Self-managed superannuation fund (SMSF) investors could face higher stamp duty and capital gains tax if they do not fully understand the legislative requirements for holding a residential property in their fund.
"With recent legislative changes, more SMSF trustees are considering borrowing to invest in property. However, putting the right strategy and structure in place is a complex process, so trustees need to fully understand the legislative and compliance requirements," Perpetual Private Clients senior manager Chris Balalovski said.
"When people seek our guidance, we find the most commonly neglected elements are the nature of the holding trust (which has the custody over the property) and the details of the loan documentation. The result of this could mean unexpected stamp duty and capital gains tax liabilities," he said.
Balalovski said trustees must establish that the trust deed allows a borrowing for the property.
"The strict rules then state that the borrowing must be in line with the fund's investment strategy and take into account the future financial needs of all members," he said.
"Failure to do so may result in a fund becoming non-complying and losing its tax concessions. It's also important for trustees with existing arrangements to have their deed reviewed to ensure they comply."
About 15 per cent or around $34.2 billion of SMSFs' existing allocation to cash and shares will be redeemed to buy property over the next few years, according to research by Perpetual Private Clients and property investment strategist Capital 360.
Trustees should take into account the time to retirement and income requirements of their members in order to find the right property for the fund to invest in, according to Capital 360 executive director Sean Preece.
"Investors in property need to take the same analytical, unemotional approach to their property purchase as they do to any other asset class such as shares or bonds to ensure they achieve the right mix of diversification, return and capital growth in their property investment," he said.
"It is worthwhile taking the time and effort to get it right, as historically residential property has delivered solid, reliable returns over the medium to long term and can add significant value to an investment portfolio."
