Leveraging legislative changes: A shift in the SMSF investment landscape
The 2023 Class Annual SMSF Benchmark Report heralds a major shift when it comes to investment preferences for Self-Managed Super Funds (SMSFs) driven largely by property market conditions and recent changes to legislation.
In this article, we explore the reasons behind this trend and how SMSF clients can strategically leverage these changes to enhance their financial positions.
Legislative changes and their impact on SMSF investment preferences
As of 1 July 2021, following the safe passage of the Treasury Laws Amendment (Self Managed Superannuation Funds) Bill 2020, the number of members allowed in an SMSF increased from four to six members, opening up new investment avenues for SMSF members.
Correlating with this legislative change, this year’s data reveals an intriguing shift in SMSF investment decisions. From 2021 to 2023, direct equities have experienced a decline, while there is a noticeable increase in direct property investments.
Furthermore, when we drill down into assets invested by SMSFs by number of members in the fund, we can see this shift is primarily being driven by SMSFs with five members or more.
How SMSF clients are leveraging legislative changes to invest in property
Enabled by a greater asset pool at their disposal, it appears SMSFs with five or more members are getting their foot in the property market by purchasing property at a greater scale than ever before. In addition, we can see that SMSF’s with five or more members are favouring commercial property investments over residential opportunities, suggesting that funds once focused on direct equities now have the members and scale to purchase properties and are also utilising limited recourse borrowing arrangements (LRBA).
An LRBA allows an SMSF to borrow to purchase assets which may have previously been beyond their means. That property is then held within a separate Trust structure until the loan is repaid, providing a level of protection for the fund’s other assets, from adverse investment outcomes.
Exploiting legislative changes for strategic gains
For SMSF clients, the expanded number of SMSF members offers valuable opportunities to optimise SMSF investment strategies. Families with adult children or those involved in businesses together can pool their funds within an SMSF, creating a larger capital pool to venture into both commercial and residential property investments.
This can be especially attractive to small and family businesses seeking to acquire commercial premises as the SMSF can purchase the premises and then subsequently lease it back to the family or small business at market rates.
The evolution of the SMSF investment landscape has been significantly influenced by recent legislative changes and shifting property market conditions. As the 2023 Class Annual SMSF Benchmark Report shows, the rise in SMSF investment preferences towards property, particularly commercial real estate, shows a departure from the previous strong positive trends involving direct equities.
Savvy families, including those in business partnerships, can be seen to be harnessing the legislative change to member numbers, consolidating their financial resources within an SMSF, and some are then using LRBAs to undertake property investments, leveraging their way into competitive property markets.
To review your SMSF strategy or for expert advice on the options you have available, speak to an SMSF expert. Findex has a team of specialists who are ready to help you make the best decisions for your SMSF.
Book a call with our SMSF Administration and Advisory team today.
The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex.
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