The surge of SMSFs

As one of the run-away success stories of the pandemic, property (of all types) has been continuing to boom in 2022. But while most brokers will be well aware of the demand from upgraders, first home buyers and investors – a lesser-touted segment of the market that has been booming over the pandemic has been driven by property purchased by self-managed super funds (SMSFs).

Speaking on The Adviser’s In Focus podcast, Per Amundsen, company secretary of Thinktank, and Peter Vala, general manager of partnerships and distribution, revealed that the lender’s SMSF portfolio had performed very well through the pandemic: “We’ve seen a 10 per cent lift in SMSF transactions... and that includes a large skewing to industrial property.

“There’s a misconception that residential is the key target in SMSFs. That’s not so. In fact the industry statistics show it’s 2-1 in favour of commercial property. At Thinktank we’re 3-1 in favour of commercial.

“If I buy a residential property in my SMSF, I can’t live in it. It’s got to be used for investment. Whereas if I buy a commercial property, I can have my own business be the tenant. That’s a big difference. Why wouldn’t I pay rent to myself (my own fund) rather than a third party?”

They expect that this trend will continue to play out in 2022, with more SMSFs looking to “business real property” – where a commercial property can be owner-occupied.

“Owner-occupied industrial property is proving to be a great investment for SME operators who are saving for retirement” - – Per Amundsen, company secretary, and Peter Vala, general manager of partnerships and distribution, Thinktank

“Owning the commercial business premises within the SMSF creates some great advantages such as the ability for SMSF trustees to make ‘in specie’ contributions as part of the transaction,” they continued, but noted that property cannot be owner-occupied in residential SMSFs.

“It’s also appealing for those who have chosen the SMSF option later in life, as the various CGT exemption options available can enhance the financial benefits.”

Overall, SMSF activity in general has been thriving this financial year. On 1 July 2021, changes were brought in allowing self-managed superannuation funds to have a maximum of six members, increasing the membership from four.

While the vast majority of SMSFs have just two members, the change has benefited larger families in particular – who can now share an SMSF if they number six or less.

Indeed, ATO stats show that the total number of SMSFs increased in the first quarter of this financial year by nearly 7,500 – the largest quarterly increase for the last five years. Given the capability to add more members, it is perhaps unsurprising that the total number of SMSF members surged to a new record high – with 1.123 million members now in Australia. In fact, over the three months to September 2021, just under 17,000 people joined SMSFs.

While many of these people may be families including more of their children into their SMSFs, undoubtedly many more will be business partners looking to take advantage of greater cost efficiencies (with costs, levies and audits spread across more members) and potentially remove the need for multiple funds and the duplication in costs that come with it.

Mr Amundsen and Mr Vala suggested that this surge in members would continue to be a trend seen during the rest of 2022: “We are beginning to see larger families and/or business partners take up the option of having six members in a fund, a change that came into effect from 1 July 2021.

“We anticipate this growing, given the previous limit of four members caused restrictions,” they said.

It could also lead to greater activity in SMSF lending (limited recourse borrowing arrangements, or LRBAs) this year, as these trustees look to take out loans to invest in more assets, while average loan sizes would also likely increase.

“As a lender we count member contributions as a source of servicing. So the more members you have, the more potential servicing you have and the greater loan you can take out,” they explained.

Benefits would also flow through to brokers writing SMSF loans, too: “The big thing for a broker is that an SMSF is a very sticky asset. It stays on the books for a long time. Which means there will be a long time of passive income covering the cost of a broker’s time in continuing to help your client build their business and net wealth,” they said.

Listen to more!

Find out more about the SMSF rule changes and how brokers can learn more about SMSF loan writing by tuning in to the In Focus podcast In Focus: How the changes in SMSF rules impact lending, partnered by Thinktank

5 top tips for writing SMSF loans

from Per Amundsen, company secretary, Thinktank and Peter Vala, general manager of partnerships and distribution, Thinktank

                  
1.

With the demand for SMSF LRBAs, it is a great time to seek training from your lender partners to familiarise yourself with the basics and take advantage of the many opportunities available.

2.
Work closely with a lender who is highly experienced and will help you from start to finish with structuring your deals to get the best client outcome.

3.
Keep across daily industry updates emailed to you or sourced on the web. Not all are essential reading but can be really useful in helping you stay well informed.

4.
If your client is wanting to take advantage of complex tax availabilities, recommend they have a good financial planner and accountant. Similarly, a good lawyer working with you and the client’s advisers can make the transactional experience a lot smoother.

5.
Advise your borrower to leave plenty of time for formal credit approval and not to sign a contract of sale without at least seeking a level of credit endorsement in advance.

[Related: In Focus: How the changes in SMSF rules impact lending]