LRBAs have raised concerns over just who is qualified to advise SMSF trustees on direct property investment
The property investment industry in Australia is big business.
Over 1.7 million people claimed exposure to property via their 2011 personal tax returns and the broader industry also includes billions of dollars of commercial property owned by a range of entities such as companies, trusts, managed investment schemes, holdings and so on.
It is safe to say that property is a significant industry and Australians have an appetite for property as an investment. This appetite is being amplified by the strong uptake of SMSFs and the growing interest in borrowing via an SMSF to invest in property, that is, limited recourse borrowing arrangements (LRBAs).
LRBAs allow funds with lower balances, namely those around the $200,000-plus mark, to invest in real property via a leveraged borrowing position, whereby the borrowings are serviced by the compulsory contributions to the funds and the rental returns.
Allowing SMSFs access to borrowing via these arrangements has opened up new avenues of opportunity for developers, property marketers, selling agents, buyers agents, property investment advisers, mortgage brokers, accountants and financial planners - all keen for commission payments or professional service fees as a result of trustees buying direct property via their SMSFs.
As with any transaction outside of an SMSF, these professionals compete hard to win the business of budding investors. However, when you introduce the SMSF into the equation, you are doing something that hasn’t been a part of the direct property investment landscape before. You are introducing a new ‘financial product’.
ASIC classes SMSFs as a financial product and advice pertaining to financial products can only be provided by licensed financial planners or accountants (under existing exemption legislation). Unfortunately, this message doesn’t appear to be getting cut through.
We are still seeing and hearing SMSF advertisements from real estate agents, property spruikers, developers, mortgage brokers, and so on, all who have vested interests in attracting new sales in the form of property and ancillary services, such as property investment advice and LRBA lending.
These professionals should be very careful in the role they play as part of any property investment transaction. Any spruiking by such professionals will certainly attract the attention of ASIC, as indicated in ASIC’s recent remarks regarding SMSFs and their appropriate use.
As an industry it’s important we move on from sale-style pitches from agents, brokers and the like. They have a role to play in the professional services process, but under the current legislation, these professionals have no role to play in assessing or making any recommendations as to the suitability of an SMSF for anyone. This is the role of the licensed financial planner or accountant.
PIPA recently met with members of the ASIC SMSF taskforce and they clarified with us this separation of roles. Only those licensed to provide advice on ‘financial products’ can advise on the suitability of SMSFs.
Other professionals involved in the property transaction process can perform their duties, if they are qualified, where applicable. For example, brokers can work with trustees to discuss suitable lending options and buyer’s agents and property investment advisers can work with SMSF trustees to determine the suitability of any property they are considering for purchase.
These are good examples of professionals working within their disciplines for the pursuit of success for their clients.
We applaud ASIC for their work in this area and we see a small win in our pursuit for full regulation of the property investment industry, via the indirect confirmation of a SMSF as a financial product.
But as a consequence, our association remains troubled by the knowledge that financial planners and accountants, with no formal qualification or education around property investment, are potentially providing advice on property selection to SMSF trustees.
It’s vital that financial planners and accountants up-skill their investment knowledge in the direct residential property investment space. Otherwise, the temptation of big commissions through sales via unscrupulous operators promoting their wares through the likes of planners and accountants, will once again affect innocent victims.
Another positive move in pursuit of better protection for trustees of SMSFs and in general would be for the government to legislate for property to be classed as a financial product, when the purpose of sale is for investment. PIPA continues to lobby the government for such legislation, which would bring increased professionalism to the property investment space.
Ben Kingsley, chair of PIPA
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