Investors are using self-managed superannuation funds to buy an apartment or house to pass on to their children as a way of helping their offspring gain a foothold in the rampant Sydney and Melbourne property markets. Anecdotal evidence suggests that investors are becoming increasingly concerned about housing affordability and those that already have mortgages are using their self-managed funds to buy property for their children.
Financial advisers say impending changes to the super rules have prompted some investors to consider using family trusts for the same purpose. From July the government will introduce a $1.6 million ceiling on the amount of money that can be held in a tax-free private pension, which is driving investors to consider family trusts as a tax-efficient alternative to super.
Grant Abbott, principal of self-managed fund specialist NowInfinity, said that family trusts could put down a deposit and take out a mortgage and had the advantage that the property would be owned by the trust, so there would be no impact on the investment if the adult child suffered financial difficulty or divorce.
"It's a more strategic way of doing things. The property isn't in the child's name," Mr Abbott said.
Fear of missing out
Sam Henderson, of planning boutique Henderson Maxwell, said buying a property inside a self-managed fund was "a great way" to hold an asset such as property because the property could be sold free of capital gains tax when the investor started a super pension. Liam Shorte, of Verante Financial Planning, said he had seen cases of self-managed fund trustees using their fund to buy property with the aim of passing it to their children.
"Because of the fear of missing out, people are doing everything they can. People want to get on the bandwagon as soon as possible," Mr Shorte said. "The baby boomers aren't waiting until they die to pass on their assets because they can't see how their kids are going to buy property in the next 10 years," he said.
Hari Maragos, of Victoria Wealth Management, said he had heard of such cases and agreed that it was a "great idea". However, Mr Maragos warned that the strategy would trigger two sets of stamp duty, while the new limit on the amount of money that can be held in a super pension could give rise to a capital gains tax liability.
Exit strategy needed
Mr Maragos said that stamp duty would need to be paid when the property was bought by the trustee from the fund and again when it was transferred to the child, even if it was gifted. If the trustee had more than $1.6 million in their pension account, capital gains tax would need to be paid on amounts above that level. If a child purchased the property directly from their parent's super fund, they would need to pay a market rate.
"It's a great idea but no one is talking about the exit strategy like stamp duty and capital gains," said Mr Maragos.
Some advisers were concerned that the strategy would not meet super's so-called sole-purpose test, which states that super is maintained for the purpose of providing benefits to its members upon their retirement.
However, other advisers pointed to a second part of the sole-purpose test, which says that super should also provide benefits to a member's dependants if a member dies before retirement.
"Super is an estate planning vehicle because you don't know when you are going to die," Mr Henderson said.
Mr Abbott said one of the drawbacks of using a self-managed fund to purchase property for offspring was that the child might be 35 or 40 years of age by the time a parent started a pension and was able to transfer the property. "It's a bit too late," he said.