ASIC raises alarm bells about spruikers exploiting SMSF rules to push dodgy property investments

ASIC is currently undertaking “limited surveillance” of financial advisers and accountants over concerns that property spruikers are encouraging investors to set up self-managed super funds purely as vehicles for "dodgy" property investments.

The corporate watchdog also has a taskforce focused on the aggressive marketing of speculative property investments, according to report in The Australian.

"We don't want SMSFs to be the preferred vehicle for dodgy property spruikers," says ASIC commissioner Peter Kell.

Kell says being encouraged to set up a SMSF “solely to invest in direct property” should be a “warning sign” for consumers.

He says a big risk for SMSF investors is speculating on property in areas where they are less familiar.

This would suggest ASIC concerns about investing in areas such as remote mining towns, where new housing developments have been heavily promoted by marketeers.

According to Kell, in some cases investors are being flown to places like the Gold Coast, shown a property and then steered through all the steps necessary to set up the SMSF, including creating the holding trust required to act as custodian of the property and arranging the loan and purchase of the property.

Current tax rules do allow investors to put investment property into their SMSF and also borrow against the fund to acquire property - provided it is done at arm’s length and with the appropriate structures.

But Kell says setting up a fund just to acquire and hold property is clearly in breach of the spirit of DIY funds by not achieving diversity and may also breach trustee obligations to maintain liquidity in the fund.

Investing in property through a SMSF holds significant tax advantages with the maximum rate of tax paid on rental income being 15% and falling to 0% if the SMSF is in the pension phase.

This compares with personally held property where rental income is taxed at a marginal tax rate, which in some cases can be as high as 46.5%.

“ASIC has concerns that people are being encouraged to set up SMSFs in situations where they don’t have the resources, experience and understanding to ensure they actually generate the expected benefits,” says Kell.

Kell says the resourcing issue is not just about money but having the time to properly manage your SMSF.

But he says ASIC is emphatically not anti-SMSF, but is worried that as the sector grows in popularity it will be a target for fraudsters.

ASIC hopes to release research into this aspect of SMSF investing in 2013.