Self-managed super funds are scrambling to buy an investment property before a deadline passes in just five weeks’ time — bucking the trend of prospective landlords shunning bricks and mortar.
Under a deal reached with the Greens last week, the Federal Government agreed to reverse a 2007 law that allowed SMSFs to borrow to buy a residential rental property.
Unlike a traditional mortgage, where the banks can repossess other assets like a house or a car if a borrower defaults, “recourse” provisions in outgoing laws only allow a bank to take possession of an investment property but nothing else in the super fund.
Sign up to The Nightly’s newsletters.
Get the first look at the digital newspaper, curated daily stories and breaking headlines delivered to your inbox.
By continuing you agree to our Terms and Privacy Policy.
Existing borrowing arrangements for self-managed super funds, entered into before August 10, are being grandfathered with up to six members allowed in these retirement savings vehicles.
For that reason, enquiries to borrow to buy an investment property within a self-managed super fund have soared ten-fold during the past week, buyers’ agent Lloyd Edge, the founder of Aus Property Professionals told The Nightly.
“As soon as that was announced, we’ve had a scurry of people all of a sudden, urgently wanting to do it because it will be the last chance that they get to do it,” he said.
“So, a massive uptick there both from people that we worked with years ago that suddenly have just come back and the new clients.”
Aus Property Professionals received 20 enquiries from customers with a self-managed super fund on Tuesday last week, the day Labor announced a deal with the Greens to ban SMSFs from borrowing to buy a residential investment property.
That was up from the usual two enquiries a day before the deal was announced and is occurring despite a property downturn occurring as a result of Labor’s changes to negative gearing and capital gains tax concessions.
“They are unique circumstances – it’s certainly bucking the trend,” Mr Edge said.
The uptick in SMSFs buying an investment property is coinciding capital city auction clearance rates plunging to just 45 per cent in the week ending on June 28, which was the worst result since the start of COVID in 2020, updated Cotality data released on Thursday showed.
Waning demand from investors saw just 43.1 per cent of homes sell above the reserve price in Sydney, compared with 46.6 per cent in Melbourne, following three Reserve Bank interest rate rises this year and Labor’s property tax changes.
Limited recourse borrowing arrangements, where a bank can only repossess the investment property but nothing else in the self-managed super fund, are being grandfathered.
“With other traditional loans from the bank, if something falls over in your investment path, the bank can come over against your other properties and things like that but with SMSFs, they can only recall on that property alone so it’s actually a safer strategy,” Mr Edge said.
The SMSF Association is advising self-managed super funds and their trustees to have contracts in place before August 10 to get the grandfathered arrangements.
This means a contract to exchange an investment property has to be signed by deadline.
Under the deal with the Greens, the ban on SMSFs buying a residential — but not a commercial — investment property would be coming into effect 45 days after Governor-General Sam Mostyn signed the Treasury Laws Amendment (Tax Reform No. 1) Bill on June 26.
The Greens secured an amendment to ban self-managed super funds from buying a residential investment property in exchange for Labor maintaining grandfathering for negative gearing and capital gains tax concessions on investment properties exchanged before Budget night on May 12.
Negative gearing tax breaks for landlords making a rental loss will be restricted to brand new investment properties from July 1, 2027, unless a house or unit was exchanged before Budget night.
From that date, the 50 per cent capital gains tax discount is being replaced by a 30 per cent tax on inflation-adjusted gains.
Australia was home to 672,805 self-managed super funds in March this year, having total assets of $1.06 trillion – or a quarter of the $4.4 trillion in total super assets, Australian Prudential Regulation Authority data showed.