ASIC Warning on Super Gearing involving National Rental Affordability Scheme properties

ASIC has issued a warning to SMSF investors to be wary of investment proposals that promote super gearing on the basis that the residential property to be acquired has special (and generous) financial incentives from the National Rental Affordability Scheme.

The National Rental Affordability Scheme offers financial incentives for participating residential properties which are rented to eligible tenants for rental fees which are discounted by at least 20% to the market rental rate.  While the financial incentives can be of a material amount (up to $100,000) the entitlement to the incentives can be highly conditional and require long term participation in the Scheme – participation of 10 or more years.  In particular, withdrawing a participating residential property from the Scheme (eg by having to sell it) before 10 years of participating will generally mean that the financial incentives will be lost.

SMSF investors need to be aware that participation in the Scheme is subject to restrictions, that there are likely to be fees charged by approved Scheme participants and that the financial incentives are provided to approved scheme participants and those participants may not pass on the entire financial incentive to the owners of the residential properties.

Essentially the Scheme is a wholesale arrangement where the financial incentives are provided to the approved participants.  The approved participants may sell the participating properties to retail investors.  Typically, if a participating residential property is sold to a retail investor, the approved participant may pass on some of the financial incentives to that retail investor.  Whether financial incentives are passed on to the retail investors is entirely a contractual matter between the approved participant and the retail investor.

As with all subsidised investments, the issue which SMSF trustees and their advisers must consider is whether the investment (sans the financial subsidy) is meritorious to deserve consideration.  If the only reason the subsidised investment is financially attractive is because of the subsidiary – then the SMSF investor must realise two things:  the first is that, explicitly or implicitly, they are buying the financial subsidy.  The second is that the financial subsidy is usually very highly conditioned and any breach of the conditions may result in a loss of the entitlement to the subsidy.