The “obvious number one” defect in relation to SMSF advice is that the costs of administrating an SMSF is not realistic for the amount of funds available, said Alison Maynard, ombudsman of investments and advice at FOS.
“There might be reasons why someone wants to start a SMSF with a lower balance, but that has to be articulated,” Ms Maynard said.
“There can be a statement claiming reasons why it might be appropriate. But if I look at that, on the face of it, it doesn’t look good. You’d have to have good reasons why that’s appropriate.”
Another recurring defect in SMSF advice is the use of gearing where it has no clear and obvious benefit, Ms Maynard said.
As an example, Ms Maynard said she’s seen instances of gearing strategies being used within a super fund where the taxation benefits are not as substantial as they would’ve been if gearing was used outside of a super fund.
“We don’t understand why that happens, and it’s another defect we see,” she said.
Ms Maynard also stressed that practitioners “must, must, must” consider their clients’ insurance situation when it comes to advising on their SMSF. This is another key and ongoing area of dispute that FOS sees, she said.
“It may be that some superannuation has to be left in the previous fund so that people can retain those covers,” she said.
“Or, you need to ensure, if the client is going to another provider to arrange insurances, that they are in place before the money is moved to the SMSF.”
Ms Maynard also noted a key defect in SMSF advice is that clients are not obviously capable of understanding and undertaking their role and responsibility of an SMSF trustee.
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The real “red flag” in this article is that it is being made by FOS. Its clear the regulators are concerned about SMSF advice; LRB has created great opportunities for people to enter this domain to promote their “services”. Unfortunately many dont actually understand what they are dealing with and the risks to them and their clients when it is not donte right. The last two lines of the article say it all I believe – this is the ticking timebomb and an area of great opportunity to lawyers and those of us who do actually understand SMSF’s.
Given every commenter has spotted the dare I say it “defect” in the ombudsman’s commercial logic the next question is how many accountants and planners were criticised or even penalised as a result of it?
A key defect with FOS is its failure to understand its role as an ‘Ombudsman’ service.Too often it becomes an advocate for complainants.
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Bit of a worry the ombudsman is saying they see people gearing in SMSF as a defect when the tax savings would have been greater outside. The only way it could be greater in the SMSF is if they have a personal marginal tax rate below 15%!!! It is ALWAYS going to lower in a SMSF so by the Ombudsman’s logic there should never be a geared investment in a SMSF.
Surely they understand the primary reason for gearing is to magnify returns NOT to get a tax advantage. Indeed the Ombudsman spokesperson sounds like she is going perilously close to advising people to making the tax benefit their primary focus for the investment and breaching PT IVA.
Ms Maynard says shes seen instances of gearing strategies being used within a super fund where the taxation benefits are not as substantial as they wouldve been if gearing was used outside of a super fund.
I am not surprised. This will be the case wherever the clients personal marginal tax rate is greater than 15%, ie in most cases where the SMSF is in accumulation mode.
Obviously the trustees decided to borrow to buy the property because they expect that in the long run, which should be at least twenty years, the return, ie the rents plus the capital gains, will be greater than the cost, on an after tax basis, and this excess will enhance the members retirement benefits. There can be no other reason for a SMSF borrowing to buy a property (at least without breaching the sole purpose test).
The fact that someone else would have got a greater tax benefit than the SMSF is not relevant to the trustees decision to borrow to buy the property.
“As an example, Ms Maynard said shes seen instances of gearing strategies being used within a super fund where the taxation benefits are not as substantial as they wouldve been if gearing was used outside of a super fund.”
As super funds are taxed at 15% then of course the taxation benefits of negative gearing are less then if your tax rate is 30%, 40% or 49%. That is obvious to anyone who understands our tax system. Gearing is not about taxation, it is about accessing growth assets when you cannot buy them outright and the asset appreciates at a higher rate the cost of holding it.
Anyone who recommends negative gearing purely on the basis of taxation benefits is an idiot.