SMSF licensing requirement a "necessary" change

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While possible changes to negative gearing have dominated the property-related headlines in recent months, there is another important legislation change that is set to come into effect this week that all investors should be mindful of.

From 1 July 2016, accountants in Australia will no longer be permitted to provide advice around establishing a self-managed superannuation fund (SMSF) unless they hold an Australian Financial Services (AFS) licence.

The requirement for accountants to hold an AFS licence before providing SMSF advice is a directive from the Australian Securities & Investment Commission (ASIC) and is one that is supported by those in the industry, such as David Shaw, director at accounting firm WSC Group.

“I think it’s a really good move and it’s a culture change for the industry,” Shaw told Your Investment Property.

“Accountants will feel that they’ve been advising clients for many, many years on this and all of sudden they’re not compliant from the first of July, so it’s a real culture change for the industry but it’s a necessary one,” he said.

In particular Shaw believes the licensing requirements will help prevent accountants from joining forces with developers to set up an SMSF for a property purchase when it may not be an appropriate course of action.

“It stops certain parts of our industry from teaming up with property groups or developers to set up funds without due consideration and the best interests of clients,” he told Your Investment Property.

“There’s now a best interest clause, you’ve now got to consider the best interests of clients when setting up an SMSF.”

In Shaw’s opinion the move to make AFS licences compulsorary for those providing SMSF advice also comes at the right time given the fact that the sector has become more complicated to navigate in recent times.

“We’re very much in agreement with ASIC and the ATO that a self-managed super fund shouldn’t be set up with a balance of less than $200,000. We use to say $150,000, but now with the banks tightening up on the requirements of liquidity in funds it’s almost mandatory to have $200,000 now.

“Some of the banks are requiring 30% liquidity in your fund. So if you had a $200,000 fund, you’ve got to have $60,000 in cash at the end of the transaction.”

Last year ASIC issued advice to SMSF advisers and accountants that it believed setting up an SMSF with a balance of less than $200,000 was not suitable.

Shaw also said changes to superannuation contribution limits mean it’s now even more important investors are getting qualified advice.

“We’ve always thought that when you’re going to have a property [in an SMSF] that you shouldn’t have more than a 65% loan to value ratio. The reason being is that the whole purpose of buying a property in a self-managed fund has to be to pay down the balance so it provides an income stream.

“There’s particularly a danger now that contributions are now being limited. From the first of July 2017, no matter who wins the election, we believe it’s going to be $25,000, so a couple will only be able to put in $50,000 per year anyway.

“If you looked at say $10,000 for insurance, there’d only be $40,000 to service the property. If you had more than two or three properties it would be very difficult to pay down the loan and that’s where we think trustees are going to get into trouble in the future.”

While accountants have known about the impending licensing requirement for some time, Shaw said it is likely some in the industry may operate outside the requirements and he encouraged investors to make sure they’re receiving SMSF advice from somebody who is qualified to provide it.

“There will be an element of the profession that will continue to [provide advice without an AFS licence] because it’s a grey area where the taxation advice ends and the financial planning advice starts.

“The big thing people need to do is just ask whoever’s giving advice if they have a licence. If you’re talking to somebody about an SMSF it’s the first question you should ask.”

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