Self-managed superannuation funds (SMSF) represent the fastest growing superannuation sector in Australia, with $531.5bn assets held by SMSFs. A corollary of this growth is the impact upon an individual’s estate planning considerations. Those issues were considered in our October 2013 edition of Wills Watch. Piper Alderman regularly assists clients to establish their SMSF and advises trustees and members on their estate planning implications. Given the growth and the availability of limited recourse borrowing to buy real estate it is timely to note some developments in this area.

A trustee of a SMSF is required to prepare an investment strategy so as to eventually provide pensions to fund members. Due to the ease of acquisition, shares and other equities have been traditionally favoured by trustees. Now that there has been a relaxation of borrowing rules, trustees of SMSF are now better able to acquire real estate.

In September 2012, ASIC established an SMSF Taskforce in response to an increase in geared investment strategies, increasingly aggressive advertising and the collapse of Trio and the subsequent Parliamentary Joint Committee on Corporations and Financial Services’ Inquiry.

The overarching aim of ASIC’s SMSF Taskforce is to ensure that those investors for whom an SMSF is suitable receive good quality advice and services from gatekeepers. ASIC does not want to see an influx of trustees who are ill-equipped to cope with the responsibilities and obligations of running an SMSF. On 18 April 2013, ASIC Commissioner Peter Kell said “ASIC has ramped up its attention on a sector that is of growing importance to more Australian investors. We want to help ensure that we have a healthy SMSF sector.”.

By 18 April 2013, ASIC had conducted a review of over 100 investor files relating to the establishment of SMSFs that were provided by financial planners and accountants. The files targeted were considered to be in higher risk categories through, for example, having lower balances or less diversified investments.

While most advice provided was rated as adequate there were pockets of poor advice in that:

  • An inappropriate single asset class being provided to investors (e.g real estate).
  • Suitable alternatives to an SMSF were not considered.
  • There was inadequate consideration of the investor’s long-term retirement planning  objectives.

Corporations Act 2001

In 2013, the Corporations Act (Cth) (Act) was amended by the Corporations Amendment (Future of Financial Advice) Act 2012 and the Corporations Amendment (Further Future of Financial Advice Measures) Act 2012.

These  amendments  inserted  Part  7.7A Division 2 – Best Interest Obligations and Renumerating and Subdivision B—Asset based fees on borrowed amounts.

The purpose of these amendment bills, (per Hansard, House of Representatives, Report from Committee, Wednesday, 15 May 2013), was to:

“…provide some discretion to ASIC and the RBA in terms of reviewing certain licence holders, while also prescribing specific licence holders for ASIC and the RBA to assess annually. During the committee’s  inquiry,  stakeholders  noted that the proposed amendments would allow ASIC and the RBA to better prioritise resources and ensure that attention is directed to primary areas of focus, including large retail markets.”

The Explanatory Memorandum for the Corporations Amendment (Further Future of Financial Advice Measures) Act 2012, states:

Product commissions may encourage advisers to sell products rather than give unbiased advice that is focused on serving the interests of the clients. Financial advisers have potentially competing objectives of maximising revenue from product sales and providing professional advice that serves the client’s interests.

The Bill amends the Corporations Act to define “conflicted remuneration” and to ban its receipt and payment in certain circumstances. The Bill establishes the ban on the receipt by licensees and their representatives, and on the payment by product issuers or sellers, of remuneration that could reasonably be expected to influence the financial product advice given to retail clients.

Section 911A of the Act requires any person carrying on a financial services business in Australia to hold an Australian financial services licence (AFS) or be a representative of an AFS licensee. Under s766B of the Act, financial product advice is defined as a recommendation, a statement of opinion or a report of either of those things that is, or could reasonably be regarded as being, intended to influence a person’s decision in relation to a financial product.

ASIC warning to real estate industry

By way of a media release on 6 November 2013, ASIC warned the real estate industry that agents, who recommend investors use an SMSF to invest in property, must ensure they are appropriately licensed to provide the advice.

As per s766B of the Act, a person provides a financial service if they provide financial product advice. Providing financial product advice includes making a recommendation or a statement of opinion to a person to set up an SMSF or use an existing SMSF to purchase real property through that SMSF. This is because the vehicle through which the underlying investment is made is an SMSF and an interest in an SMSF is a financial product. Therefore, a person who makes such a recommendation or statement of opinion provides financial product advice even where the underlying investment (i.e. real property) is not a financial product.

ASIC is concerned that, with the increased popularity of SMSFs and property investment, real estate agents may not realise that they may be carrying on a business of providing financial product advice and may need an AFS licence, or authorisation under an AFS licence, when making recommendations or statements of opinion to a person to use an SMSF to invest in property.


The Act provides that a person convicted of carrying on an unlicensed financial services business may be subject to a fine of up to $34,000 or imprisonment for 2 years or both. If a company is convicted it may be liable to penalties, including a fine of up to $170,000.

In the event that real estate agents are operating in circumstances where an AFS licence is required, they must immediately cease offering and providing financial services until such time as an AFS licence is obtained or they become a representative of an AFS licensee. Real estate agents must also immediately cease any advertising, including any representation on a website or at presentations that indicates that they are providing financial services. In continuing to provide financial services real estate agents may be committing an offence and consequently be liable to prosecution.

Benefits and commissions

There are some real estate agents who are offering commissions or benefits to financial advisers for recommending investors use an SMSF to purchase property. Such commissions or benefits may be conflicted remuneration and financial advisers may be banned from receiving them. This is because the commissions or benefits could reasonably be expected to influence the financial product advice given to retail clients.