Estate agents warned not to give dodgy SMSF advice: accountant

Real estate agents have been warned not to dispense inaccurate information to clients about the virtues of setting up a self-managed super fund to buy an investment property.

Liz Westover, head of superannuation at the Institute of Chartered Accountants, recently received a letter in the mail from an estate agent full of what she called “technically wrong and misleading” information, “particurlarly in relation to tax measures”.

“Furthermore, the information was presented in such a way that it all sounded very straightforward,” Westover writes on her blog.

“These issues are never straightforward, and there are a range of factors that need to be given due consideration, not only before entering these borrowing arrangements but also before setting up an SMSF.”

She says investors should consider factors include costs, risks, returns, responsibilities of operating one’s own super fund, insurance and current superannuation savings.

“As we all know, SMSFs are not the best superannuation option for everyone, and they should not be set up simply as a vehicle to borrow to buy real estate.

“Borrowing can be a valuable tool within an SMSF to bolster retirement savings, but it must be used appropriately and in full knowledge of the facts and all the associated risks,” Westover says.

The warning comes as the popularity of using a SMSF to invest in property continues to grow.

A survey carried out by SMSF provider Multiport in late March 2011 found that at least 13% of the 1,400 SMSFs it administers are borrowing to invest using limited-recourse loans, and more than half (56%) of these loans are used to buy property

The average property loan among Multiport client funds is $200,000, compared with $110,000 for shares and managed investments.

In total SMSFs that Multiport surveyed hold 16% of their assets in property, nearly double the allocation in global shares.

John McIlroy, CEO of Multiport, says the higher weighting to direct property is not surprising, as direct property has become a more popular form of investment since the legislation change in 2007 that allowed SMSFs to borrow.

A survey of by Mortgage Choice revealed that one in 10 first-time investors will use their self-managed super fund to make their first investment.

Westover says the misleading information in the estate agent letter highlights the role a professional accountant play as trusted advisers on such matters.

“No doubt, many professional accountants have been approached by clients looking for advice, having been told of the benefits of borrowing within an SMSF, perhaps by a real estate agent or by other means,” she says.

For more on self-managed super funds, see our e-book 16 questions self-managed super fund trustees should ask before investing in property.