Warning as self-managed super investors scramble to buy residential property

When the federal government indicated it was about to abolish negative gearing on established properties and reformed the capital gains tax (CGT) system, property investor and B.Invested founder Nathan Birch says he was unmoved.

However, when it announced that the ability to borrow to buy residential property through private self-managed super funds (SMSFs) was to be axed, he was outraged.

“There are around 660,000 SMSFs out there, and this was a very attractive scheme,” he says. “They would pay just 15 per cent on investment earnings instead of 25 per cent following changes to CGT, and selling from an SMSF after you turn 60 resulted in zero tax to pay.”

Elevate your living experience with our digital magazines

Browse Domain’s property and lifestyle magazines.

Read now

Critics of the changes say large superannuation funds had been lobbying to close the loophole as it enabled direct investment and the ability to benefit from capital growth and rental yields. While the changes will likely make it safer for investors, Birch says many may switch to commercial property, which carries a higher risk profile.

With the cut-off point set for August 10, Birch says people are now scrambling to buy, and he’s just had his busiest month of buying property in 17 years. He urges as many people as possible to rush to climb on board and have their arrangements grandfathered.

“You still have a little time as you just have to have the contract signed and any loan application submitted to the bank by the guillotine date,” Birch says. “You don’t have to have settled; you just have to be in the queue.”

However, the danger is that investors might become so frenetic in their race to take advantage of the scheme before its demise that they may not evaluate a potential investment as rigorously as they usually would, warns Ray White chief economist Nerida Conisbee.

“If they’re interested in a project that they feel is a good investment opportunity, then absolutely it’s a good idea,” she says. “That would be worth trying to push ahead with. But looking for something just to beat the deadline … I don’t think that would be a good strategy.

“Buying commercial property within an SMSF is really popular for business owners who might want premises to use, or for industrial sites that might get rezoned as development sites. But while commercial property can be lucrative, it is more complicated than residential, with the lease structure, tenancy agreements and zoning.”

At mortgage brokerage Shore Financial, chief executive Theo Chambers also recommends that investors rush only if they already have a residential purchase they’re considering, that aligns with their long-term strategy, and that they’ve obtained advice on.

“The key advantage is the ability to leverage superannuation savings into a larger asset,” he says. “For example, a $250,000 super balance could potentially be used to purchase a $1 million property at around 80 per cent loan-to-value ratio, meaning investors receive the benefit of capital growth on the $1 million asset rather than earning returns solely on the $250,000 balance.

“While there are interest, maintenance and other holding costs to consider, selecting a property with a strong rental yield can help offset a significant portion of those expenses over the long term.

“Refinancing is also likely to remain available, meaning investors who purchase before the deadline could preserve borrowing flexibility that may not be available to future buyers.”