SMSFs and the practicalities of real estate investment

Here we go again – ready for another big year in superannuation. Already, unfortunate events this year have highlighted some areas of concern. Not least of all, the flood crisis around Australia that has caused untold damage and heartbreak.

While the full extent of destruction to property and infrastructure is still being determined, flood affected communities are rallying together to rebuild and repair the damage. But as property owners assess their repair needs, the trustees of self-managed super funds (SMSFs) that have invested in ‘real property’ through limited recourse borrowing arrangements, have run into some issues.

Currently, the rules around these arrangements limit the ability of owners to fund repairs to their property; many SMSF investors with flood-damaged property are likely to be affected.

The SMSF industry, including the Institute, has for some time been highlighting the practicalities for real estate investment to the Australian Tax Office (ATO) as they work through the limited recourse borrowing arrangements legislation. We have been arguing that without the capacity to repair a property, SMSFs are unable to appropriately deal with the realities of property ownership. It has now taken the unfortunate, large-scale damage caused by the floods to provide a significant and practical illustration of this legislation’s shortcomings.

If the limited recourse borrowing arrangements are not meant to apply to real property investment, then this type of investment should simply be disallowed from the arrangements. If, however, common sense prevails, the legislation needs to be changed or given a meaningful interpretation to truly accommodate the realities of property investment and ownership which, by their very nature, will include repairs.

Do you know of anyone who has been recently caught out by this legislation? Feel free to comment below or send me an email. We need to make it very clear to government and the ATO that there is still much work to be done!