Dangers of SMSF’s pushing people to buy property

Peter Kell, the Deputy Chair at ASIC, talks about the dangers of people spruiking property for their self managed super fund (SMSF)

Introduction – Dangers of SMSF ’s pushing people to buy property

Ross Greenwood: First up on Work. Life. Money, I want to take you to something that really troubles me. Right now, around Australia you’re going to see a whole lot of marketing, a whole lot of advertising to try and convert your superannuation fund into a self-managed super fund. Now the real bait here I think is that you can then go out and invest in property, say, for example.

One of the real sales pitches is if you come and create a self-managed super fund, you can then start to borrow money and you can stick your money into a property and that’s going to be a great thing to do. Now, it may be a great thing to do. It may be a great strategy that some people feel works for them. The problem I have, the really significant fundamental problem that I have with this, is that, for a lot of people, those people who are trying to attract you to the other side effectively a self-managed superannuation fund and then going off and buying property and borrowing money to do so, I think in a lot of cases these days, there’s a significant number of sharks that have actually come into this pool.

I think what’s taking place is that there is easy money there for, in many cases, people who are taking probably either invisible commissions or commissions on the sale of the properties. And as a result of this, they are placing people in significant harm’s way. Now, we’ve seen the types of scams with properties in the past. Keep borrowing to buy one, then borrow to buy another, then borrow to buy another. Don’t worry, the property prices will never fall.

Well, the truth is property prices do fall sometimes. And if you are overgeared and you can’t get tenants then you have got a potential of losing significant amounts of money. In this case even the money that you set aside for your retirement. A man that I think really would be understanding, in fact, I know that a lot of work has been done by our corporate regulator ASIC in regards to try and close down some of these schemes. Peter Kell is the Deputy Chairman of the Australian Securities and Investments Commission who is on the line right now.

This I think is a fundamental problem right now. I think there’s brokers, I think there’s scammers, I think there’s all sorts of people selling inappropriate products. In fact, I think in many cases that this idea of creating self-managed super funds and then buying property is effectively a form of mis-selling.

Interview with Peter Kell, Deputy Chairman ASIC

Peter Kell: Well, I think your starting point is right. For some people buying property through an SMSF sometimes, for example, for business people who want to buy their business premises, it might work. But we have seen too many examples of property spruikers targeting SMSF s as the, if you like, the new vehicle for promoting high-risk property spruiking. And it’s something we’re warning about, it’s something that we’re investigating, and we’ve had a couple of cases where we found people who, unfortunately, have lost a lot of money.

Ross Greenwood: Okay, because there are certain rules that those people who create a self-managed superannuation fund have got to be aware of. Number one, the investment strategy has got to be for the benefit of the members. Number two, that it’s got to be done in a prudent manner. And number three, quite clearly, because the government doesn’t want people losing their nest egg, their superannuation and then going back on an age pension in the future, it’s one of these situations where they want people, you want people, to at least have some some rational strategy when they go out and invest their superannuation funds.

Peter Kell: That’s right. And the starting point here is before you even get to the property investment, are you in a position where you’ve got the capacity, and the experience, and indeed the interest in running your own SMSF? There are significant duties that you have as a trustee in setting it up and ongoing costs and dealing with the accountant. That’s the first thing that sometimes skated over by people who are are pushing SMSF s as the magic way to invest in property. But running an SMSF is not a casual thing, it’s a serious business with legal obligations.

Then, for the property itself, yes. Unfortunately, we do see quite a few instances where the property is basically it, it’s the investment. And that breaks all the rules of diversification. And for people who say, “Well, I’ve got two other properties.” Having three properties is not going [laughs]-

Ross Greenwood: That’s right, that’s having three properties. And then you’ve got the other side of this and that is, “Who is selling those properties?” Because there’s been so many examples in the past where the property sold might have such enormous commissions or upfront costs in front of them. And if you suddenly find that either something goes wrong with that development, something goes wrong with trying to get tenants in there, then it can be a complete disaster for people that really is a time bomb ticking.

Peter Kell: And we want to make sure that people are not going into this without a good understanding of that issue. And getting caught up in the get-rich-quick aspect is not going to help you. For example, the borrowing costs now are typically higher for property, through SMSFs. People need to understand that, they need to understand all the other costs that can come here. The legal fees and other fees that attach when you’re investing through this channel.

And then at the extreme end, unfortunately, we’ve also seen a few too many cases of outright fraud, and we’ve taken action there, where the money has actually not been put into the property but has been used elsewhere. At the margin, you’re getting sharks in this water.

Ross Greenwood: I tell you, one of the classic examples of this is a mob called ParkTrent Properties. Now in a judgment that goes back to the 20th of October, 2015, when the then Acting Justice Sackville indicated that it’d be restrained from carrying on a financial services business, I think it was for five years at the time. But it was what he said in that judgment I thought it was really quite good. And ParkTrent, I should say, had advised more than 816 members of the public to switch and create self-managed super funds and invest in property.

He observed the ParkTrent’s business model depended on persuading relatively unsophisticated investors of the virtues of using their superannuation accounts to purchase investment properties and to establish self-managed superfunds. “Investors were influenced to make important decisions containing their superannuation strategy with little or no genuine consideration of whether the decision took proper account of their individual financial circumstances. Some suffered financial loss as a consequence.”

Now that to me is the classic example. My problem I guess I put to you, Peter Kell, is I think from the time that ParkTrent got thrown out of the industry that many others have been allowed to proliferate, or simply have proliferated out there.

Peter Kell: Look, as you know, Ross, we took that action against ParkTrent for the very reasons you set out. We wanted to highlight that this behavior was unacceptable. And also it was the first time that the federal court has actually ruled on the fact that to advise on investing in property through an SMSF requires you to be a licensed financial adviser. If you’re coming up against someone who’s advising you to invest in property through an SMSF and they’re not licensed then that’s easy to check on ASIC website.

Don’t go near them. And if it looks like it’s a cosy [laughs] deal between an adviser and a property developer and whatnot– look, it’s better to draw a breath and think very seriously about whether you’re going down the right road. In some cases it might be but, as I said, where– property spruikers, this is the new area they want to get into, they want to encourage people to use SMSF s, so it seems like a good idea but it can go badly wrong.

Ross Greenwood: I tell you what, it can look like a good idea which is the reason why it’s a relatively easy sale for some of the spruikers and, as we pointed out, it can in the best of circumstances be a perfectly reasonable thing to do. The only thing we’re trying to say to you is stop and have a really decent think about what you’re getting yourself into. The Deputy Chair of the Australian Securities and Investments Commission, Peter Kell. As always, Peter I appreciate your time on the program.

Peter Kell: Thanks very much, Ross.

Ross Greenwood: Yes. It’s just one of those things, be very, very careful is what we’re trying to say. Because especially with property prices, especially on the East Coast of Australia, being so hot and also with some forecasts out there, the property prices could cool. There are going to be some areas, many areas of new development that can get caught out a little bit. And if you’re being pushed real hard, you want to ask about all the commissions, about the licensing and make certain you know exactly what your getting yourself into. We got more Work. Life. Money coming up.

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