SMSF gearing strategies are not to be taken lightly, as this article by SMSF expert Trish Power makes clear. Used judiciously for the right clients, they can be effective, but our experience is that they are often recommended for clients to whom they are not suited. Worse, they are sometimes recommended in ways that breach the various rules for them, with sometimes very serious ramifications. Common mistakes include:
Failing to establish a bare trust for a SMSF gearing transaction before the SMSF pays the deposit on the target property, whether or not the purchase agreement includes a purchaser nomination clause.
This potentially triggers a double stamp duty and creates a risk that the SMSF has breached the rule against acquiring assets from members (section 66 of the SISA). The rights under the land contract cannot be acquired by the SMSF from the member. And the nomination clause/mechanism will not work because you cannot nominate someone who did not exist at the time of the purchase.
To understand more about the pitfalls of transferring property within an SMSF, see this article by Kenneth Ang.
Failing to observe Dover’s conservative SMSF lending rules regarding income, super fund amount balances and the type of property being purchased.
Remember, advice always has to pass the reasonability test. Especially when it comes to gearing within an SMSF, just because a client can does not mean a client should. The geared investment asset needs to meet all the criteria that would make it the best course of action for a client. The amount borrowed needs to be kept small and the property purchased needs to be one that would make sense as an investment even if it were not being bought within a SMSF.
- Recommending an off the plan apartment. This is simply never a good idea.
- Recommending an off the plan apartment for which the adviser gets a commission. See 3 above. This is an even worse idea.