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Article archive
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Quarter 2 April - June 2018
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Quarter 1 January - March 2018
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Quarter 4 October - December 2017
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Quarter 3 July - September 2017
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Quarter 2 April - June 2017
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Quarter 1 January - March 2017
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Quarter 4 October - December 2016
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Quarter 3 July - September 2016
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Quarter 2 April - June 2016
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Quarter 1 January - March 2016
Quarter 4 of, 2016 archive
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Investor habits: The good, the bad and the ugly
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Keeping finances in the family
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The inter-generational financial squeeze
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Merry Christmas for 2016, a Happy New Year and a prosperous 2017.
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ATO set to clamp down on range of super issues
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SME retirement plans in jeopardy, research finds
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SMSFs show restraint in hot residential market
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Investment's building blocks - always worth reinforcing
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Warnings issued on traps with CGT transitional rules
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Meet SMSFs' early and late arrivals
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Beware, the ATO is on the hunt for lifestyle assets
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'Brexit means Brexit' means what?
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SMSFs tipped to be hardest hit by pension changes
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SMSF assets hit record, but funds still hoarding cash
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Markets caution advised as economic bubbles loom
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Stretching retirement income
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Some financial terms explained
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Market Update – September 2016
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Checking in on our 2016 economic outlook - and looking ahead
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Making a fairer and more sustainable Superannuation System
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Going undercover
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‘Winners and Losers’ from new super proposals
SMSFs show restraint in hot residential market

 

One of the property stories receiving a strong run is the recent auctioning of a rundown, free-standing cottage in suburban Sydney.

This "renovator's dream" sold for $3.91 million - $910,000 above reserve.

       

 

Continuing record-low interest rates are spurring Sydney and Melbourne homebuyers to pay prices that may have seemed unachievable just a short time ago.

While this long-running hot residential market is attracting a wide variety of buyers, the tax office's recently-published Self-managed super fund statistical report - June 2016 appears to show that SMSF trustees are not prominent among them.

The tax office estimates that SMSFs held $24.2 billion of their assets in Australian residential property at June 30. This equates to 3.9 per cent of total SMSF assets.

Interestingly, SMSFs held almost three times the exposure to direct Australian commercial property than local residential property.

Going back five years to June 2011, SMSFs actually had 3.6 per cent of their assets in Australian residential property.

The SMSF Investment Patterns Survey September 2016 - published by SMSF administration firm SuperConcepts - found that 1052 of 2900 surveyed client funds (with a total of $3.1 billion in assets) held direct property at June 30. And 72 per cent of these were commercial properties.

The average value of residential properties held by these surveyed funds was $393,000 against an average of $692,000 for commercial properties.

When considering whether or not to invest in residential property, SMSF trustees have much to consider including:

  • Restriction on acquisition: SMSFs are not allowed to acquire residential property from their members. (Funds are, however, permitted to acquire business property from their members.)
  • Diversification: Some trustees may conclude that the ownership of a costly piece of real estate may inhibit their funds' ability to gain adequate diversification to other asset classes.
  • Investment strategy: Trustees are required to prepare, implement and regularly review an investment strategy that has regard to the whole circumstances of their fund. These circumstances include: investment risks, likely returns, liquidity, investment diversity, risks of inadequate diversity and ability to pay member benefits. A decision needs to be made whether or not a residential property fits with a fund's strategy.
  • Rental yields: Rising prices have lowered average rental yields on residential properties.
  • Improvements and geared property: SMSFs using a limited recourse loan arrangement can only drawdown on the loan to repair or maintain a geared asset, not to improve it. (This applies to loan arrangements entered into after July 7, 2010.)
  • Tax treatment: Many trustees make a decision whether to hold initially-geared direct property inside or outside super. Factors to consider here include comparative tax treatment for negative gearing and capital gains. Advice can be critical.

Of course, a decision whether or not to invest in residential property should largely depend on the personal circumstances of a fund and its members - taking account of their super and non-super assets - along with any professional advice received.

 

Robin Bowerman
12 November 2016 
www.vanguardinvestments.com.au