Investing in property gains traction, size really does matter!

Co-founder of the Switzer Report
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New figures from the ATO show that investing in residential property is finally starting to gain favour with SMSF trustees. Investing in residential property was made more attractive when the ATO issued a ruling that allows improvements, such as a kitchen renovation, to be made to a property funded through a limited recourse borrowing arrangement, provided that the funds for the improvement come from other monies.

Over the year to 30 September 2012, investments by SMSFs in residential property rose from $14.8 billion to $16.3 billion, an increase of around 10%. Admittedly, this growth comes off a very low base, with residential property only representing a tiny proportion of total SMSF assets at around 3.5%.

Where are SMSFs investing?

Shares and cash/term deposits continue to account for the bulk of SMSF investments – just over 60% at the end of September. On paper, there has been a material shift into shares by trustees, with investments growing over the year to September from $118.3 billion to $141.5 billion – an increase of almost 20%. Adjusting for the increase in the S&P/ASX 200 over this period of 9.4%, the increase is a little more measured – however, still significant.

Size, Fees and Performance

Size matters! Bigger funds do better – and pay less!

Reflecting the impact of the fixed fees on running a fund and overall fund performance, the ATO figures comprehensively show that, on average, as the SMSF gets bigger, fees go down as a percentage of the overall assets, and performance improves!

The chart below shows the average return on assets by SMSFs for the year to 30 June 2011 compared to their average operating expenses, arranged by the size of the fund. For example, SMSFs sized between $200,000 and $500,000 had an average return of 5.04% and an average operating expense ratio of 1.37%. Funds sized from $1m to $2m returned 7.29% on average, and paid only 0.41% in fees.

So, if there is any take out of this data (the exact pattern is also the case for the 2008, 2009 and 2010 years), see what you can do to lower the fixed costs of your fund (and potentially transaction or investment management costs). If you can’t make additional non-concessional contributions, can you bring in other members – family or friends?

Where do Trustees fall fowl of the rules?

The ATO says that the Number 1 type of breech reported to it by approved auditors is ‘loans or financial assistance to members’, followed by breech of the 5% cap on ‘in-house’ assets. The top contraventions reported to the ATO from 2005 to 30 June 2012 are:

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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