26 Aug SMSF buyers beware – Rafe Berding
The legal technology experts at GlobalX are encouraging buyers to be mindful when dipping into their superannuation to purchase investment properties following a recent spike in sales funded through Self-Managed Super Funds. We talk to Rafe Berding about their concerns
Kevin: In this show, we’ve quite often discussed the pros and cons of having property, both commercial and residential, in your self-managed superannuation funds. I was interested recently to read the release from technology experts, GlobalX, who we’ve had on the show before about some warnings for people about what you need to know before you start dipping into your superannuation. While that can be good, there are some things that you need to be aware of.
Kevin: Joining me, GlobalX Chief Marketing Officer, Rafe Berding. Good day, Rafe. How are you doing?
Rafe Berding: Good. Thanks Kevin. How are you?
Kevin: Yeah, good mate. A timely warning, I think, and a couple of things that you mentioned in your release that I certainly was not aware about, particularly in relation to having, I think, you referred to it as a liquidity buffer in your superannuation. Could you explain what you mean by that?
Rafe Berding: Yeah. That’s correct, Kevin. We are seeing an increase in the amount of people looking to their self-managed super funds to invest in property. This is due to several reasons around the current play with the finance institutions and the recent share price performance. Certain considerations must be made though and one of them, which you did state, is the liquidity buffer. What this means is you must have 10% of the proposed investments value as a liquidity buffer.
Kevin: That’s at the time of purchase?
Rafe Berding: That’s correct.
Kevin: Yup. Okay. If it would increase in value, you don’t have to continue to top it up to meet that value or it’s just at the point of purchase?
Rafe Berding: Just that point in purchase.
Rafe Berding: That’s correct.
Kevin: Yup. Okay. I understand to that there’s a lot of regulations around loan documentation and making sure that you get all that correct as well.
Rafe Berding: Yes. There’s a lot of different rules that must be met around complying with investing in property through your self-managed super fund. You must meet the sole purpose test and that means providing retirement benefits only to fund members. Other things that include only … The property cannot be acquired by a related party and it cannot be lived on or rented by a related party as well. There’s a lot of different formalities around the setting up of the self-managed super fund and more importantly, about getting that loan and that’s where you really need to seek that independent legal and financial advice.
Kevin: Yeah. You really do need someone who is familiar with it because you raise something there that I’ve seen many people come unstuck with and that is that they can put a property in the super and then live in it themselves, but you can’t do that. You can’t even have a relation in there. Anyone who’s a direct relation with you.
Rafe Berding: That’s correct. You cannot have any relations. You cannot live in it yourself and importantly, can’t even onsell it after the fact.
Kevin: There are some variations there when you get into commercial property because I notice a lot of businesses are actually having their commercial premises in their superannuation fund and then occupying it, which is quite legal. It’s a little bit different.
Rafe Berding: That’s correct. It is different to the residential property. Commercial property is different. If you are looking to add that to your portfolio, best to speak to your financial and legal adviser as well, because there’s other certain risks around investing … with your self- managed super funds that includes higher costs around loans and includes cash flows and it includes the possibility of it hard to be able to cancel that contract.
Rafe Berding: For instance, if your self-managed super fund loan documentation and contract is not setup correctly, unwinding that arrangement may be a lot different than your traditional loan with your bank.
Kevin: Yeah, and you could end up being at a sever financial disadvantage. The advice here is to make sure that you are working with a solicitor and an accountant and your whole team, who is familiar with all the rules and regulations around investing in self-managed superannuation funds. Rafe?
Rafe Berding: That’s correct, Kevin. It’s not around your risk portfolio and your investment, but it’s also around ensuring that you have considered everything from all the costs to your exit strategies as well and that’s best sought not for your financial adviser but also from your legal and conveyancing professionals and second to that, it’s really about understanding that it is a more highly regulated process and it is riskier in certain elements, so it’s imperative that you really do understand your responsibilities in managing it as well.
Kevin: Rafe Berding there, who is the GlobalX Chief Marketing Officer. Rafe, thanks very much for your time.
Rafe Berding: Thanks Kevin.