FOFA fails to address gearing in SMSFs
With the Future of Financial Advice (FOFA) reforms having come into effect as of 1 July, Tria Investment Partners Andrew Baker says the legislation has failed to address the issue of widespread gearing within the self-managed superannuation fund (SMSF) sector.
Baker said FOFA applied only to financial products. He said real estate - property sold outside of an unlisted property trust - did not fall under new regulations pertaining to commissions.
According to Baker, commissions can still be earned on an equivalent piece of real estate and on a related mortgage.
“In isolation, each of these might have modest impacts, but together it’s a potent combination,” he said.
Combined with the relaxation of gearing in super and the few limits on the formation of SMSFs, particularly in regards to the decreasing opening balances of incumbent investors, “FOFA has then created a reinforcing remuneration incentive to promote this strategy”, according to Baker.
Referring to Australian Taxation Office data for 2011-12, Baker said SMSFs have gradually increased exposure to commercial and residential real estate from 15.2 per cent to 15.7 per cent.
He said the shortfall of FOFA in regards to gearing within SMSFs reinforced their potential role of competitors to the mainstream.
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