ASIC must deter SMSF property spruikers

There is clearly regulatory concern about the activities of property spruikers as they seek to target SMSFs and, as Mike Taylor writes, a clear message needs to be sent. 

The Australian Securities and Investments Commission (ASIC) must move much more overtly to eliminate property spruikers from the self-managed superannuation funds (SMSF) equation. 

The regulator has moved some way to addressing the issue, but it is becoming increasingly clear that both it and the Australian Taxation Office (ATO) must send a clear signal that they will clamp down hard on the various schemes spruikers are promoting to attract SMSF investors. 

There were those who were always worried about the consequences of the Government’s changes in 2007 which cleared the way for borrowing inside superannuation, and it is worth noting that some warned of the changes giving rise to rorts of the type which are currently manifesting themselves. 

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This is not to say that the rules around borrowing within super are not clear-cut, but rather to suggest that SMSF trustees can too easily incur major losses before breaches are detected. 

With 20/20 hindsight it can be argued that combining SMSFs with residential property investment was always going to be a problematic mix.

Residential property represents the biggest single investment held by most Australians while superannuation represents the second largest investment. Add to that the fact that SMSFs are the fastest-growing segment of the superannuation sector. 

For most of the past 18 months there have been warnings issued about property spruikers targeting SMSFs, including cautionary words from the Reserve Bank which canvassed the possibility of such activity contributing to a property bubble. 

That warning drew a rebuttal from the SMSF Professionals’ Association of Australia (SPAA) with its chief executive, Andrea Slattery, denying there was any head-long rush by SMSFs into inappropriate property schemes. 

However there is clearly a difference between SMSFs which are receiving advice from planners and accountants who are members of organisations such as SPAA, the Financial Planning Association (FPA) or the Association of Financial Advisers (AFA), and those who are self-directed. 

Further, some of the property promoters have actively canvassed the establishment of SMSFs as the first step in participating in their schemes – something which necessarily limits the likelihood that the trustees would have received appropriate advice. 

There is, as yet, no suggestion that the property spruikers are being allowed to run rampant, but an announcement from ASIC last week suggests that they are becoming increasingly creative in seeking to appeal to SMSF trustees. 

The regulator recently issued a statement warning consumers “about advertising that promotes the use of SMSFs to invest in residential properties through the National Rental Affordability Scheme (NRAS)”.  

“ASIC is aware that a number of SMSF promoters include misleading statements in their ads about the grants that may be available under NRAS. ASIC has seen ads stating that consumers can use their superannuation to purchase a property using the scheme and receive ‘$100,000 tax free’,” the regulator’s statement said. 

“These ads do not provide balanced messages about the features, benefits and risks of investing via an SMSF in an NRAS property. Such ads should make clear to consumers: that eligibility to participate in the scheme is subject to restrictions; the likely fees associated with purchasing, tenanting and managing properties purchased from NRAS-approved participants; that to receive a total financial incentive of $100,000, consumers will need to remain in the scheme for 10 years; and that they will be required to rent out the NRAS property at 20 per cent below the market value to eligible tenants”. 

The ASIC announcement then went on to explain the various other technicalities which might persuade SMSF investors to reconsider the type of investments being advertised. 

Nowhere in the ASIC announcement was there any suggestion that the promoters of the schemes had been reprimanded or penalised, but there has been sufficient regulator activity around “false and misleading” advertising in other sectors of the financial services industry to indicate that action has been taken. 

It is arguably in everyone’s interests for all the regulators to send a clear message with respect to property spruikers and SMSFs. Action needs to be taken before a relatively small problem escalates.

This article originally appeared in Money Management magazine.

Originally published on SMSF Essentials.