Regulators apply heat to property spruikers targeting SMSFs

Property spruikers pushing individuals to set up self-managed super funds (SMSFs) to buy direct property are coming under increasing pressure from financial regulators.

ASIC recently published a lengthy hit list of its actions against spruikers who adopted allegedly illegal or questionable tactics in their targeting of SMSFs. Alleged offences included providing unlicensed investment advice, misleading advertising and deceptive conduct.

Among the key focuses of ASIC’s SMSF taskforce are so-called one-stop operators that provide a range of “services” from the same organisation. Their one-stop operation may cover advice on the establishment of an SMSF, transfers of super savings into a new SMSF, recommendation of investment properties, property management, insurance and taxation.

And the tax office, as the regulator of self-managed super, is paying close attention in 2015-16 to promoters making “cold calls” to persuade individuals to establish an SMSF to invest in a particular investment such as direct property. These calls are often made without regard to whether an SMSF is appropriate, according to the ATO.

Further, the federal government has instructed the Council of Financial Regulators and the tax office to monitor the risk of SMSF borrowing to invest over the next three years. Most SMSFs that gear to invest using limited recourse loan arrangements buy direct property.

The tax office’s latest Self-managed super fund statistical report shows limited resource loans represented 2.6% of total SMSF assets as at June 30. Significantly, the total amount outstanding in these loans has markedly increased from $755 million five years ago to $15.6 billion today.

Here are six pointers to help SMSF trustees and other investors avoid being caught by property spruikers:

1. Treat cold calls with extreme suspicion

Peter Crump, superannuation strategist for ipac South Australia, says unsolicited calls urging the establishment of an SMSF to invest in property should be treated with extreme suspicion.

Indeed, Crump suggests any recommendations to set up an SMSF to make a certain investment be treated with concern – whether or not the recommendation arises from a cold call.

2. Don’t accept SMSF investment advice from an unlicensed person

Only holders of an Australian Financial Services (AFS) licence are legally permitted to provide investment advice, including about whether an SMSF should invest in a direct property.

As Crump emphasises, licensed advisers are legally required to act in the best interests of their clients.

The Supreme Court of New South Wales recently ruled that property spruiker Park Trent Properties had unlawfully carried out a financial services business without a licence by advising investors to buy investment properties through SMSFs.

3. Watch out for one-stop shops pushing property to SMSFs

Such one-stop operations offer a range of “services” that may include superannuation, property sales, accounting and financial planning from the one organisation. Crump says these one-stop operations are typically set up to really achieve one outcome – to sell property.

ASIC has found these businesses typically take a “one-size-fits-all approach” with all investors receiving the same suite of products and services. “… they end up with an SMSF, a property investment and a limited resource borrowing arrangement”, ASIC adds.

4. Don’t waste your time at property sales seminars

Crump rhetorically asks: “If what the speakers are saying at these seminars is so good, why are they sharing their secrets?” He believes these seminars are a waste of time and money.

5. Understand that property spruikers tend to view SMSFs as ‘pots of gold’

Chris Malkin, senior consultant auditor with Baumgartner Superannuation, believes property spruikers tend to view SMSFs as “pots of gold”, particularly as the funds are permitted to gear their properties.

Malkin says he is not opposed to SMSFs owning direct property in appropriate circumstances. His own SMSF owns a two-storey office block and an inner-city apartment.

6. Realise that property spruikers targeting SMSFs must be feeling the heat

Malkin and Crump both say property spruikers must be feeling the heat as the regulators focus increasingly on their operations.

Crump does not believe the federal government’s recent rejection of a recommendation by the Financial System Inquiry to prohibit SMSFs from borrowing using limited resource loans will provide any relief to property spruikers.

“Indeed there should be fewer and fewer property spruikers as the ASIC processes work,” he says.