Setting up an SMSF to buy property is a risky strategy

THE regulator, the Australian Securities & Investments Commission, is examining a worrying new trend where self-managed super funds are being set up specifically to buy investment properties, in clear breach of the spirit but not the laws governing SMSFs.

ASIC commissioners Peter Kell and Greg Tanzer are focusing a taskforce on aggressive marketing of speculative property developments, where the (usually leveraged) investment is reverse-engineered into a new SMSF thanks to collusion between marketers and unscrupulous advisers.

"It should be a warning sign to any consumer if they're being encouraged to set up an SMSF solely to invest in direct property," said Mr Kell, speaking exclusively to The Australian.

Without actually articulating the Q-word to described Australia's northern state, he said carefully that the big risk was "speculative property in areas with which the consumer is less familiar".

"We know enough from history to be certain that spruikers will push property in the good times: we want to make sure this does not create problems in the SMSF sector when the cycle invariably turns," he said.

"And in particular we don't want SMSFs to be the preferred vehicle for dodgy property spruikers," he added.

A problem at the moment is that there is nothing illegal being done in this situation, where for instance investors are flown up to the Gold Coast, shown property, and then steered nimbly through the paperwork that includes setting up the SMSF and the holding trust that is required to stand as custodian of the asset, and arranging the purchase and loan.

It's not illegal to put investment property in to an SMSF and to gear up the asset via a holding trust, but it clearly fails to achieve diversity and may breach trustees' obligation to maintain liquidity in the fund.

"Research that we hope to make public in early 2013 will help to generate discussion in the industry," Mr Kell said.

"We're currently conducting a limited surveillance of advisers and accountants in this area, to help us get a better sense of what is suitable advice."

He said he and his colleagues were also concerned about the way some types of distressed US properties were being aggressively marketed in Australia.

"We've seen flyers for seminars spruiking these types of US properties in cities such as Canberra and Sydney and we're looking closely at this development," he said.

And he would like people to realise that aside from the right choice of investment targets, there is a lot more to getting into an SMSF than merely stumping up money: there's time, inclination and experience to consider as well as the old question of what the minimum should be, he says.

"In the past commentators have suggested that $200,000 is a minimum amount," Mr Kell said.

But, he added, there was the related and very relevant issue of how much the member should expect to pay to run that SMSF during any given year.

(Given that it is generally believed it costs between $2500 and $3000 a year just to administer the fund, that would represent a minimum annual fee of 1.25 per cent, more than most managed funds, and that is not counting advice.)

"ASIC has concerns that people are being encouraged to set up SMSFs in situations where they don't have the resources, experience and understanding to ensure they actually generate the expected benefits," he said.

"And the resourcing issue is not just about money: it's about the time you have to spend to manage a SMSF, and if you have less time, you'll almost certainly have to pay more."

Mr Kell is emphatic that ASIC is not anti-SMSFs in general. "We most certainly are not," he said, noting that they "clearly offer a lot of benefits to a wide range of people".

What's worrying him and Mr Tanzer, as ever with a regulator, is that a sector that's exploding in popularity such as SMSFs is going to produce a fat target for fraudsters "at the extreme end", as he put it, indicating that the problem is not widespread but could be.

"We have investigations under way into cases where operators have sought to get people into SMSFs with a view to committing fraud," Mr Kell said.

"A classic warning sign about that has been in cases where the adviser has sought not only to advise on setting up the SMSF, but has wanted to control the investment policy and not inform the trustees about the decisions made."

Mr Kell is keen to point out that fraudulent set-ups are a tiny subset compared with the group of SMSF set-ups that come from advice that is just plain bad or wrong.

"We're already seeing examples of people who have set them up then they've realised what's involved, in terms of time alone, to manage them properly," he said.

Justin Fraser AR No. 292086 and Marjade (Qld) Pty Ltd trading as Bayside Financial Planning provide financial planning advice and services as Authorised Representatives of Barchester Financial Services Pty Ltd AFSL 490348

Credit Services are provided to you by Justin Fraser in his capacity as an Australian Credit Representative 374012 of Outsource Financial Pty Ltd, Australian Credit Licence 384324

 

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