The tax office is “progressing a large number of cases where [individuals have] been encouraged into property investment using an SMSF structure”, said ATO director of superannuation Howard Dickinson at the Chartered Accountants Australia and New Zealand conference in Sydney this week.
“In one particular case, we’re talking about hundreds of clients and in all of them, the LRBAs have been bungled to the point where they’re not appropriate and can’t be properly rectified, so there are some real significant outcomes,” said Mr Dickinson.
In one case involving a significant number of funds, individuals were cold called, persuaded to invest in property and then encouraged to set up an SMSF to facilitate the purchase.
“They agreed to roll over their super funds into an SMSF set up by this party and they used that money to set up a deposit for the property,” he said.
“However, because the nature of the property wasn’t suitable for this sort of an arrangement, no bank would cover them with an LRBA.”
In reality Mr Dickinson said, it turned out that these individuals were just getting a loan at a personal level.
“There’s no limit on the recourse so therefore we suddenly have the property in theory sitting in an SMSF, the loan sitting outside of an SMSF and in a number of these cases they’re in a position where there’s no way in the world they’d ever get an LRBA,” he said.
“In fact, the only reason the banks have gone anywhere near it is because of personal guarantees.”
Since the properties were located in flood plains, Mr Dickinson said the SMSF trustees were also unable to obtain insurance.
“In a large number of these cases it’s all been done in a one-stop shop, so they walk into the property person who walks them into the accountant who walks them into the financial broker – it’s all done in the one house. The person has no idea that they haven’t set it up correctly,” he said.
Mr Dickinson said while he could not disclose exact details of the cases at this point, the ATO intends to make the results clearly available as soon as it can speak publicly on the matter.
“We don’t want people getting tied up in these things and we don’t want people putting their super at risk in these spaces,” he said.
Oh dear. We have an industry placing its faith in regulation and compliance. Yet, the same industry laments the regulator’s constant failures to its consumers and industry participants alike. And yet, there’s a hope that the regulator will somehow be successful elsewhere. You simply can’t regulate for ethics or honesty. Or, what am I missing?
Thanks Michelle. We can rail about the ‘bad guys’ as long and as hard as we like but that changes little if anything. All we can (must) do is change our own behaviours and service proposition to stand in plain sight between consumers and the cowboys. I don’t know if you’re a planner so let me ask the advice community generally, “What are you doing to pro-actively educate your clients, prospects and contacts to prevent them from making the same mistakes in direct property?”
Its not about pointing fingers Wayne, but more about lamenting the state of regulation in this area – and the toothless lapdogs who can’t get hold of the crooks.
Unfortunately, I think you’ll find the vast majority of those who fall prey to spruikers and scammers are those without advisers in the first place.
Just someone sitting on a tidy industry fund balance, with a few dollars on the side they are managing themselves.
Easy pickings for a con man when there isn’t a voice of reason in the background warning them of the pitfalls.
They’re the ones being let down by the regulators.
In an ideal world Wayne you are right. Reality, you work for the firm, they are scamming people and quite scary people in that you ruin their business they could come after you OR they are a big corporate that even ASIC have trouble fighting in court. What do you do??? You go to the regulator and they are still operating years down the track because the regulator can’t do anything to stop them. Yes, you get out and go to where the ethics are but you need regulators that can catch these people or you start this warning the public you might find yourself in court or some hit man knocking at your door. This is big business for these dirt bags.
I believe the solution to these issues is not to abdicate our responsibility to regulators. Based on their capacity and performance over decades (or lack thereof), do we really believe they can do this to any extent? Even so, it’s always after the fact – and invariably well after thousands are affected and multi millions lost. Not ideal, right?
Yes, I meant ‘our’ responsibility. Each of us as professional advisers should actively educate, inform and warn our clients on all aspects on their financial life AND make available effective advice/ support at every stage of their wealth/ life journey. This must include direct property. If not, we force clients to seek advice/ information elsewhere. Is it any wonder then that so many suffer at their own hands or fall into the dark clutches of those described above. As a result we are culpable by default through neglect.
What’s that saying about pointing a finger …
These property sprukers are the scum bags of the industry. They don’t give a rip about the client & are only in it for themselves. Their knowledge of a correct LRBA strategy, structure and process is limited to nil as clearly proven above.The description of the asset purchased is discusting and if it was promoted in large numbers the promoter should be prosecuted and given jail time providing a claer message to all the scum bag marketeers. The regulators need to come down on these jerks and come down hard and make sure the clients involved are adequately compensated.
Well said Moonae. The necessity then is for like-minded professionals to work together by incorporating the skills of advisers in related fields in our service to our clients.
The key, however, is to make these strategic conversations (they are not referrals!) a core step in our process, otherwise they won’t happen. May I be so bold as to suggest that if you’re not doing this then you are failing your clients, and greatly limiting your practice.
Damn the one stop shop model. My advice to anyone is to get independent advisors across all aspects of advice and make them accountable to each other. You can’t test the advice you are getting when the people advising are cheerleaders for each other.