Getting the best advice on SMSF investing in real property: ASIC scenario

The recent ASIC review of SMSF advice revealed a number of areas for improvement in the advice-giving process.

Given the risks associated with a DIY option, ASIC has issued guidelines on the things advice providers and investors should discuss and consider before setting up an SMSF.

They outline some practical tips that advice providers can use to improve the quality of SMSF advice they provide to investors.

ASIC set out a scenario as to appropriate advice when it came to a SMSF investing in real property:

A couple in their early 50s received advice on establishing an SMSF.

The advice provider discussed the various investment options and asset classes available to the SMSF.

The investors informed the advice provider that they were experienced real property investors, having acquired three investment properties in their personal name, and that they now wished to use their superannuation savings to purchase a further investment property with the assistance of gearing.

The advice provider undertook further inquiries and determined that the investors:

• owned their home outright and had no dependants;

• had an investment property portfolio totalling $1 million, with investment loans of $800,000 and 20 years remaining on the term of the loans;

• had combined superannuation totalling $200,000 to which they only contributed superannuation guarantee contributions;

• earned a combined annual income of $120,000 which only just covered their annual living expenses, tax and the commitments for their investments; and

• intended to retire in 10 years time with a retirement income of $60,000 per year in today’s dollars.

The advice provider immediately identified the following issues for the investors:

• they had no budget, which was limiting their ability to contribute to superannuation and accumulate retirement savings;

• they had no plan in place to repay their investment loans before retirement;• the establishment of a real property investment in the SMSF would further increase their outstanding debt and concentrated investment exposure to direct real property; and

• to retire in 10 years with an annual retirement income of $60,000 in today’s dollars, they would require retirement savings of around $1.5 million in 10 years time.

Following a discussion with the investors, it was decided that the SMSF real property investment was not appropriate for the investors.