Property Spruikers have been around for a long time, and are more prevalent now more than ever. With the growth of Self Managed Superannuation Funds (“SMSF”), which control over one third of Australia’s almost $1.7 trillion Superannuation industry, SMSF Property Spruikers now have a new focus – mum and dad SMSF Investors.
The rise and shine of SMSF Property
Over the last 12 months, there has been a significant increase in awareness around SMSF Property including the ability of the SMSF to borrow to purchase property in an SMSF. Lets remember, this change occurred in 2007, however it’s not until recently that SMSF Investors have taken advantage of the change. This may be a result of the increased press – from the Reserve Bank of Australia implying that SMSFs were the cause of the property bubble to newspaper and radio advertisements, more Australian’s are curious about how to use their SMSF to purchase property in their SMSF.
What is the Law/ Regulation?
SMSFs are a Financial Product under the Corporations Law, unlike Property outside an SMSF, which is a ‘free for all’ and largely unregulated.
A person recommending a property in a SMSF must have an Australian Financial Services License (“AFSL”) or be an Authorised Representative of a AFSL Holder.
Australian Securities and Investments Commission commissioner Greg Tanzer said “We regard [recommendations to buy property through SMSFs] as investment advice and you need to be licensed and if you are not licensed we will come after you. Our message for investors is superannuation is a far too important investment in the future to be taken in by a glitzy promotion”.
What is really happening?
There are a heap of glitzy promotions out there, Melbourne investors are being offered paid airfares to the Sunshine Coast to attend a development with a ‘free lunch’, of course signing a contract on the way out, without the benefit of a second opinion and the necessary due diligence.
From your local radio station to Google advertisements, we are hearing advertisements promoting SMSF Property including taglines such as “Use your super to invest in property”. These marketers should tread carefully, ASIC has a surveillance team monitoring such advertisements – and so they should.
The danger is the “Property Seminar” where marketers will use a topic in the seminar to cover SMSF Property and cross promotes an apartment development or house and land package. An analysis is provided showing a positive cash flow property with a quick description selling the suburbs potential for capital growth and yield. You may see attendee’s rushing to the back to sign up to avoid missing the opportunity. In many occasions, this decision can lead to disaster.
A real life spruiker example
Recently, a client came to our office for a second opinion. In mid-2013, they attended an SMSF Property Seminar in suburban Melbourne. The seminar was run from an unlicensed property promoter/ agent. Within days the ‘sales’ team attended the clients house and a personalised property analysis was provided for an off the plan property for their SMSF. The numbers were so unrealistic, including 7% rental yield, 4% interest rates and 12% capital growth – unfortunately the client was not educated to challenge the analysis.
The second meeting included the contract of sale and a number of legal documents. The purchase price of the property was $480,000. The client had $80,000 in his SMSF and was on a salary of $75,000. The client, who did not receive education on the risks and benefits of SMSF, unfortunately signed an unconditional contract and paid a 10% deposit.
To any person reading the above example, you would know that the numbers just do not stack up and unfortunately the client did not come to Redwood Advisory earlier. The property marketers did not provide a Statement of Advice (they were unlicensed) or disclose the 5% plus GST commission paid to them. They offered a ‘one-stop’ solution with Property sales, Finacne and Property Manage This example is common and promoters take the commission and the client is left scratching their head – after losing their superannuation savings. Unfortunately, we see many of these examples, and support the ASIC focus on unlicensed advice to prevent examples such as these.
Can a real estate agent recommend SMSF Property?
A real estate agent can only recommend SMSF Property is they are a AFSL holder or a Authorised Representative of a AFSL Holder. If they don’t hold one, they can only provide factual information about SMSFs.
In relation to real estate agents, Mr Tanzer provided a clear warning recently at the CPA SMSF Conference ‘‘Real estate agents and property advisers may not realise that they may be carrying on a business of providing financial product advice and may need an AFS licence. Any real estate agents in that situation ‘‘must immediately cease’’ offering such advice until they got an AFS licence, he said. Otherwise they could face a fine of up to $34,000, two years’ jail, or both. A company could be fined up to $170,000.”
Property Spruikers are on borrowed time. Lets hope that SMSF investors can open their minds to such fantasy scenarios presented by Spruikers and seek advice from a licensed SMSF Specialist to avoid disaster and loss of their retirement nest egg.
Disclaimer – The content has been prepared without taking account of the objectives, financial situation or needs of a particular individual and does not constitute financial product advice.