Lawyer flags high-risk area for disputes
Advice on property purchases attracts one of the highest rates of grievances among SMSF clients, according to an industry lawyer, and could be further exacerbated by the cooling housing market in Sydney.
Maurice Blackburn Lawyers principal Josh Mennen said he is seeing disputes arise where SMSF trustees have been advised to set up SMSFs and purchase property in circumstances where it isn't appropriate.
“For example, the customer doesn't understand their obligations as a trustee of an SMSF or they may not have enough money in their super to justify a strategy of this type,” Mr Mennen explained.
“We've seen situations where people have less than $100,000 and they're being told to go into an SMSF-based strategy and that's just not sustainable.”
Often these strategies are high risk for SMSF trustees with low balances because the client is “putting all their eggs in one basket” with their entire retirement savings plan dependent on the performance of one property in a single location.
“In the case of the mining boom, some people suffered horribly after they purchased a property in a mining town and the mining bust then devastated its value,” he said.
Disputes are particularly prevalent in this area, he said, where the firm providing the financial advice has an affiliation with a real estate business.
Since the introduction of the FOFA reforms, Mr Mennen said a number of financial advice firms have moved into property spruiking.
“Some companies have established a business model where they have one arm with a financial planning licence, and another arm that has a real estate licence, and both arms receive a financial benefit because the financial adviser tells the customer to take their money out of their superannuation fund and put it into a SMSF and charges them advice fees and recommends that they invest their superannuation in a property trust,” he explained.
“So they buy a direct property but through a trust, and then obviously that property transaction is administered by their real estate licence who charges commissions.”
Mr Mennen said he believes some SMSF trustees have become overexcited by the rise and rise of Sydney and Melbourne residential property markets.
“The problem is that Sydney for example has cooled, and in some areas in Sydney, the prices in Sydney are actually decreasing slightly,” he said.
“I suspect we will now start to see a lot of SMSFs experience losses rather than gains or much smaller gains.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.