Where a SMSF embarks on an investment strategy whereby it invests in one lumpy asset such as a direct property and has very little liquidity, then it presents inherent problems for the fund.

There is increased risk where the dominant asset is a property. Think about the situation whereby one member is retired and then wants to draw a pension form the fund.

The fund will have to meet minimum pension payment of at least 4% of his/her super balance from age 65 to 74. This minimum increases as the member becomes older. If the fund has very little cash and after paying rental expenses such as rates, insurance etc. and paying administrative costs in running the fund, then the fund may not have enough left in the kitty to meet the mandatory minimum pension payment depending on the age of the member.

Solutions in situations like this is for the fund to sell the asset to be cashed up or alternatively, receive further contributions for the member or if there is a second member inside the fund who is still in accumulation phase. Remember, where the member is 65 years old, the fund can still accept contributions for him/her as long as the work test is satisfied, i.e. work 40 hours in 30 consecutive days.

Also, where the fund is still carrying a mortgage on the rental property and interest rates increase and the rent does not cover the interest and the usual running expenses of that property, then the fund is said to be negatively geared.

The tax rate applicable to super funds is 15% or 0% if the fund is in pension phase, thus presenting less of a tax benefit than if the property was held outside super, say in your own name, in which case the shortfall can be offset against other income such as salary income.

Another problem is possible capital gains tax liability. Where a member, who is not receiving a pension from the super fund, suddenly dies, the fund needs to pay out the super balance to the beneficiaries or estate. The fund will either have to sell the asset and pay out the lump sum in cash or transfer the asset in specie. Either way, a capital gain event will have been triggered.

Investing in only one lumpy asset inside super may present some liquidity problems for the fund, particularly when super contributions cease. All of the above factors need to be considered before making that decision to buy a rental property inside super.