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ATO, ASIC sound alarm on SMSF property investment

money
By mbrownlee
November 20 2018
2 minute read
9 View Comments
Alarm
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Both the ATO and ASIC have flagged SMSF property investment and borrowing as a “live policy issue” as concerns with one-stop shops and riskier mezzanine lenders continue to surface.

Speaking in a panel hosted by the SMSF Association and the ATO this week, Kate Metz, ASIC technical adviser to the deputy chair, said that based on some of the recent work ASIC has done speaking to consumers about their experience and why they choose to set up an SMSF, it is clear that property continues to be an ongoing issue for SMSFs.

“Many [SMSF trustees] chose to set up a fund to invest in property. They [tended] to solely invest in property, have fairly low balances, borrow money and often bought an off-the-plan property from a property developer,” said Ms Metz.

 
 

“For us, that rings a number of alarm bells, and we think the number of those people will not be well placed to self-fund their retirement.”

Ms Metz noted that ASIC has already publicly announced that it would be looking at one-stop shops.

“These are organisations that will set you up an SMSF, find you a property, work out your borrowing arrangements and also do your legal advice as well. We are very concerned about those sorts of arrangements,” she said.

“There are a number of policy debates going on at the moment around limited recourse borrowing arrangements and whether they should still be allowed to continue on and allowed personal guarantees as well. At the moment, it is very much a live issue that people are turning their minds to.”

Ms Metz said there is also very little discussion with SMSF advice relating to property around issues such as liquidity and falling property prices.

“People are set up with a property, but there is no discussion of what happens when you retire - does the property need to be sold? Will you be able to live off the rental yield? What happens if prices drop?” she warned.

“I think that is a real issue, and as people age or are older when they go into that sort of arrangement, the implications become even more significant for them.”

Speaking in the same panel, ATO deputy commissioner James O’Halloran said the ATO has likewise seen individuals who have not properly considered the risks with setting up an SMSF and investing in property.

“On the ground, we see people who may not have made an informed decision or one that appears to be a very binary decision of, ‘I want a house to invest in’, and maybe that is not an informed decision, or one that does not consider risks,” said Mr O’Halloran.

As part of the ATO’s vetting process for SMSFs, Mr O’Halloran said some of the reasons from individuals for setting up a fund have included a family member telling them to do so or to buy a house or holiday.

“To some of you, you might think this is laughable. The naivety of those elements reinforces the point. The seriousness of this decision for your future is not a reason not to do it, but go in informed,” he said.

“It is an obligation as a trustee. It is not a free ticket. As much as we recognize the appropriateness of people setting up an SMSF, there is an obligation.”

SuperConcepts executive manager of SMSF technical and private wealth Graeme Colley said that whether limited recourse borrowing arrangements get banned may be determined by the market with the big banks pulling out and trustees looking to mezzanine lenders instead.

“People are taking risks on mezzanine companies, which is adding more recourse to limited resource borrowing.”

Mr Colley said he expects a decrease in borrowing by SMSFs as it becomes increasingly complex and property prices in capital cities continue to fall.

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Miranda Brownlee

Miranda Brownlee

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 also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.

You can email Miranda on: miranda.brownlee@momentummedia.com.au

Comments (9)

  • avatar
    Isn't this one of the main reasons the Accountants exemption was revoked ? Clearly ASIC was concerned about the amount of 'No Advice' & 'Execution Only" SMSF established via Accountants & Property Spruikers. It is laughable with everything that is going on with SMSF / FASEA / Licensing for Accountants & the Royal Commission that accountants are still lobbying for a return to the 'Accountants Exemption' ie free reign to give no advice to a vast pool of predominantly inexperienced trustees.
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  • avatar
    This has been happening for more than 5 years and ASIC have finally worked it out -- good job people, on fire as usual. The issue is not that it is being done in an SMSF, the issue is that no one cares that dodgy companies are selling over priced properties with kickbacks not being documented with the client. Buyer beware.
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  • avatar
    Are these the same regulators that let the multi billion dollar banks get away with murder but when a few rogue trustees make bad decisions that same authority wants to clamp down on SMSF laws. How much more difficult and expensive can they make limited resource lending?
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  • avatar
    If investors, individuals or SMSF trustees, want property for rental income and/or capital growth they don't have to buy a whole property, they can "syndicate" it through fractional platforms with like minded investors, with or without a conservative amount of leverage. In this way they can limit their asset allocation and achieve diversification at the same time. Advisers should be on the front foot in regard to this strategy. Similarly, SMSFs over exposed to a single property asset need not sell the entire asset but fractionalise it and sell a percentage to other trustees. In this way they reduce their exposure and free up equity for other investments or to generate pension income. Again, advisers should be on the front foot with these strategies, it doesn't have to be an all or nothing situation.
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  • avatar
    This is typical of what is going, majority ot trustees and their advisors cover all the issues surrounding investing in property through a SMSF including retirement planning etc. So a few get rich fools on both sides lead the regulators to a knee jerk reaction about changing the law. As George said a fool is often parted with his money!. I agree though that the one stop shops should be closely reviewed. Maybe this might be more about the regulators falling asleep at the wheel!!!
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  • avatar
    A fool and his money are soon parted. It takes two to tango. Can anyone else think of some more aphorisms to describe the fact that, yes, there are crooks peddling property investments for SMSFs but if the trustees are stupid enough to listen to them, without and proper advice, then there is nothing any regulator can do to stop the process. How can we educate trustees to use their brains and not their greed to enter into these schemes without proper due diligence? This is the challenge.
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    • avatar
      I get that your comment is more about people being led astray & paying overs for property, but is the strategy of buying property in an SMSF really that bad? Long term investment owned in a tax-advantaged long term savings vehicle. Seems like a good match to me. If the client looks back in 15 - 20 yrs and reflects on the benefits of doing something positive in their fund, will it matter if they paid $570K for a property versus $550K? People who bought their own home 12 months ago would be looking at far greater price differences than this. All this talk just stops people from starting to invest, leads to procrastination and hinders long term beneficial outcomes. The best time to start investing was yesterday, the second best is today.
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  • avatar
    so if people just buy a property in their personal name (or family trust) then we can simply ignore the same liquidity and asset value issue? The SMSF/property focus seems to treat the discussion as though it is only SMSFs that invest in property, and individuals only use property to live in. The focus is clearly in the wrong spot - bad advice or no advice are equally dangerous, but good advice is essential - the same as good advice before buying a property personally is essential. Further, "many" in this sense is misleading - how "many" is "many", and what proportion of the total does this represent?
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