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SUMMARY: Super and property – more ideas surface to stop the shonks, while Senator Xenophon needs to pull his head in.
In any arena, most people play by the rules and will always be safe. Others have no interest in the rules. They’re just crooks and will be caught.
There’s always a grey area. Two sorts of operators live here. Those who are very good and who know where the real boundaries are. And those who are after the lazy buck, who everyone wants kicked out, but who aren’t actually breaking any laws.
When it comes to SMSFs and property investment, there are too many of the latter giving horrible, conflicted advice to wealth-seeking Australians who are, by buying a slick spiel, effectively signing over their super as profits to others.
Often these people didn’t have an SMSF before meeting their property sales people, but are quickly signed up for one. But many who enter these investments did have an SMSF and arguably should have known better.
The operators are too often property spruikers masquerading in outfits that make them look like they are giving legitimate tax, financial and mortgage advice, but are really just cloaking themselves with the necessary legal framework to flog off development property and stay under the radar.
Or they are paying actual accountants, advisers or brokers so much in kickbacks that the advice is tainted anyway.
ASIC is on to this (see this column, 29/7/13, and link http://brucebrammallfinancial.com.au/blog//super-property-bells-ring-louder/ ) and they are constantly on the lookout to whack those who cross the line. The number of articles appearing in mainstream media about the victims of these investment seminars is on the rise.
But if they’re not technically doing anything wrong, ASIC can’t stop them.
Sometimes the good guys step in and raise the professional bar. Which is what SPAA (the SMSF Professionals Association of Australia) has done with some new industry guidelines for limited recourse borrowing arrangements (LRBAs).
The “best practice” guidelines are aimed at getting lenders and advisers providing services or advice regarding LRBAs to sign up to a minimum set of standards. If that gains traction, consumers will start demanding it.
SPAA’s guidelines for lenders include:
- That they recommend the trustees seek advice from a suitably qualified SMSF adviser (legal or financial) and have that advice acknowledged
- They will provide information to trustees about what LRBAs are, their risks, what’s involved in establishing and maintaining an LRBA, and;
- What is involved in running a compliant SMSF.
SPAA’s guidelines have already been adopted by the National Australia Bank. Others are considering it.
What’s asked of advisers will be considerably more.
When a SMSF trustee receives advice from an adviser in regards to an LRBA, it should cover advice including:
- Whether the LRBA is appropriate for the members, in regards to fund balance, asset concentration, expected contributions and insurance needs.
- The establishment and on-going costs of running LRBAs
- Information on requirements surrounding single acquirable assets, the distinction between repair/maintenance and replacement
- Diversification and concentration of investments, investment timeframes
- Funding cash flows and ongoing expenses
- The risks/rewards of geared returns and LRBAs
- Loan-servicing requirements
- Stamp duty and capital gains tax issues
- The different responsibilities of the trustee, as opposed to the adviser and lender
(The majority of which you will find in articles covered by myself and some other Eureka Report writers over the years.)
I love property investment so much I’ve written five books on the topic (the sixth is coming). And geared property investment can be a great opportunity for some SMSF trustees, who understand the asset class and the differences in super.
But something has to be done to stop the unwary from entering into some of these “investments”. ASIC can’t close them down. SPAA’s new guidelines are a positive step.
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The otherwise usually sensible Senator Nick Xenophon is the latest to give some air to the stupid idea that Australians should be allowed to access their super to buy their first home.
No, they shouldn’t. As I’ve argued recently (17/3/14 and http://brucebrammallfinancial.com.au/blog//super-nest-egg-not-nest/ ), this is not just bad policy, it’s dangerous policy that is likely to be self-defeating.
Apart from sending the wrong message to people about what super is for, it would almost certainly push up prices, and therefore reduce affordability, just like the First Home Owners Grants (FHOG) did.
First home buyers already get some very serious legups into property. If it’s not through a FHOG-style cash handout, they get stamp duty discounts not available to second home buyers or investors. It’s usually both. It’s only the amount that varies in each state.
Check out any of the online stamp duty calculators to find out how big the handouts/stamp duty savings are. Some of them are huge!
In NSW, a second time buyer, buying a newly constructed home worth $480,000, will pay $17,411 in stamp duty and will receive a $5000 grant (net cost of $12,411). A first home buyer doing the same thing will pay $321 in stamp duty and get a $15,000 grant (net gain of $14,679). The first home buyer is receiving a $27,000 leg up into property.
And check out the list of Senator Xenophon’s plan’s supporters. They were frothing at the mouth – the Housing Institute of Australia, 1300HomeLoan, the Real Estate Institute of Australia, Mortgage Choice, Homestart … not a scintilla of self-interest showing, is there?
And while Senator Xenophon is hoping to introduce a system more like Canada’s, where the money must eventually be paid back to super, some of his cheerleaders are still quoting the Singapore example – clearly, they’ve never actually looked at it, as the comparisons to Australia’s superannuation system are very, very weak.
Senator Xenophon, if you seriously want them to access super, put up something that forces people to save in a separate vehicle that can be accessed specifically for property, like Singapore’s.
But it has to be over and above the 9 or 12% Superannuation Guarantee, the top end of which is still not going to be enough for most people to retire on comfortably.
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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au