While your scribewas tied up at theinsider tradingtrial of Perth’sponytail-in-chief

John Kizon, two seeminglyunrelated matters blipped onour radar.

The first was that Tony Abbottwas planning a royalcommission into Australia’sunion movement.

Second, the Federal Court inSouth Australia had frozen theassets of accountant andproperty investment promoterGeorge Nowak, who had run aso-called “one-stop shop” forself-managed superannuationfunds.

There are some connectionsworth thinking about — andthey are only partially inspiredby Mr Nowak claiming to haveadvised Mr Abbott onretirement income policy.

Temptation and risk aboundsfor people saving for theirretirement because we now havea resurgent property market anda sharemarket recovering someof its pre-global financial crisismojo.

The easy money has alreadybeen made in the sharemarketrecovery and investors arehaving to look beyond blue-chipstocks and consistentdividend-payers for value. Likeother keen investors, we havesome SMSF trustees looking forreturns in mid-sized andspeculative stocks.

Mid-tier stocks with less trackrecord can be tempting but comewith more risks to dividend flowand capital. Yet they too can beuseful if approached with careand attention.

If anyone thinks speculativeshare investing is easy, youshould drop into Level 5 of theDistrict Court buildingsometime over the next four orso weeks and listen to theevidence in the trial of Mr Kizonand his share investing partnerNigel Mansfield.

Mr Mansfield and Mr Kizonallegedly criminally conspiredto buy shares in AdultShop.comin the first half of 2002 afterobtaining what prosecutorsclaim was insider informationfrom the internet porn group’s

managing director Malcolm Day.The fact that the accused, one

a former boxer and one a formercasino manager, lost moneyshould be a warning to anyonewho thinks there is a lot ofscience to investing at the lowerend of the sharemarket.

Speculative stocks are a gamefor the alert and brave, such asthe late Kerry Packer’sinvestment managers who madea quick $780,000 getting in andout of AdultShop around thetime Mr Kizon and MrMansfield allegedly thoughtthey had the good oil.

It is highly questionablewhether the junior end of thesharemarket should be thedestination for your supersavings, unless you really knowyour onions, yet SMSF trusteesare known to be keen investorsin speculative stocks.

Investing in residentialproperty through your SMSF isalso a game for grown-ups,particularly when you have toborrow money to fund it.

Such arrangements add anextra layer of complexitybecause they require aguarantee from the fund’strustee that they will personallypay if there is any loan shortfallshould the property be sold.

It has become a fashionableway to unlock super, promisinginvestors big returns — and theopportunity to beat those greedyfinancial institutions — bytaking money out of industry orpublic offer super funds andstarting a DIY fund.

Anyone considering sucharrangements should get somegood, independent advice beforetaking personal control of theirnest egg.

Mr Nowak, a Deloitte-trainedcharted accountant, claimed tohave all the answers for peoplewanting to get into aself-managed super fund andbuy a property.

His “one-stop shop” wouldhelp clients set up their SMSF,roll existing funds into theSMSF, find and buy investmentproperty, manage the propertiesand look after the tax.

Mr Nowak also had clientsborrow money through theirfund to bankroll their propertypurchases.

He was getting investors tobuy properties in far-flungStates and towns, withtransactions that appear to beanything but arm’s length.

One Adelaide-based investortold Channel Seven’s TodayTonight that he bought atwo-house project in Griffith, aNSW Riverina town he onlyknew of from the Underbellyseries.

Mr Nowak reportedly was theoriginal owner of the Griffithland and earned a cut from thebuilder.

The Australian Securities andInvestments Commission lastweek gained Federal Courtorders freezing the assets of MrNowak and his wife Betty as itinvestigates his group, which isnow under the control of variousinsolvency accountants.

While the Charterhill affair isyet to fully play out, Mr Nowak’screw were not alone inpreaching the rewards ofproperty investment in SMSFs.

There is a proliferation ofpedlars offering one-stopsolutions to help use yoursuperannuation nest egg to buyproperty. One-stop often meansan investment they are sellingand offering to manage onbehalf of the trustee.

This means that the trustee isnot receiving truly independentadvice on the structures,strategies and investments fortheir super, usually their mostimportant asset after the familyhome.

If an investor puts all of theirsuper nest egg plus a big debtinto one investment property,they are making a huge puntthat that particular propertywill show strong returns overthe next decade and that therewill be no major hiccups.

Without diversification andgeared up to their eyeballs, theyare particularly vulnerable tomarket shocks — or even atenant completely trashing thejoint, or even just steadilyinflicting damage that is notpicked up or is ignored by anineffectual manager.

The same risks of slow orquick trouble apply to investorswho borrow big to bankrollshare portfolios, particularly ifthey put their eggs in a verylimited number of baskets.

Gearing can be a good

strategy if you have awell-structured and managedportfolio and the means to easilysurvive a downturn. But it is arecipe for disaster if you don’t.

What makes self-managedsuper so attractive to spruikersis that it is caught in aregulatory netherworld.

The funds are supposedlyregulated by the AustralianTaxation Office, whose primaryexpertise is compliance andrevenue collection. ASIC has avery mixed track recordoverseeing the financialplanning industry and, forbetter and worse, has verylimited powers over real estateagents and accountants.

This is a regulatory blackholeinto which billions of dollars ofretirement savings are pouringeach year. Promoting an

investment conference on aproperty website last year, MrNowak pointed out thatAustralian SMSFs invested $3.8billion in property in one yearand promised “now you can findout how to do it, too”.

Even better, you could find outfrom Mr Nowak how to retire 10years earlier. Marketers of easysolutions seem to like the term“10 years”, such as one SMSFspruiker’s flyer telling people to“convert your Super to a SelfManaged Fund and Pay off yourHome in as quick as 10 years”.

Anyway, Jeremiah has agloomier prediction of what willhappen within 10 years withunder-skilled managers ofSMSFs. Mr Abbott’s coalitioncrew is showing a preference forthe soft-touch regulation of thefinancial services industry,

starting with the winding backof Labor’s Future of FinancialAdvice reforms.

Just like the Labor Party haswith its mates in the militantunions, the Liberals have a blindspot when it comes to theirchums in financial services,lending, accounting and realestate. Go to a Liberalfundraiser and you will seethese types well represented.

All their clients will be happyas long as SMSF balances keepgrowing, driven higher in partby the money borrowed throughSMSFs to buy shares andproperty.

Yet there will be howls ofanger when the next property orsharemarket crash comes andthe loans are called in.

Trustees will be seeking bloodfrom their advisers but the fees

and commissions will long agohave been spent, donated ortucked away.

Their wrath will fall upon theeconomic libertarians whofailed to shield them from theirown gullibility. It will make theelectoral backlash suffered byPremier Richard Court in 2001after the finance broker scandalseem like a fairy tap.

Labor will return to power inCanberra and, partially asrevenge for the Liberalshobbling its union cash cow, willlaunch a royal commission intothe hundreds of billions lost inSMSFs and the role ofLiberal-leaning advisers in thisdisaster.

And, just like with the Kizoninsider case and the union royalcommission, the lawyers will bethe only true winners.

Shark tale apointer tosuper risks

INSIDER INSIGHTS

One-stop shop collapses are just a tasteof future angst if investors and regulatorsare not more careful, Neale Prior reports

Illustration: Don Lindsay

Having worked for the AustralianTaxation Office for more than 28years, I have seen many peoplecaught up in schemes that prom-ise them they can pay off theirhome in 10 years or retire earlier.

Although I cannot give you alist of who to avoid or whatschemes are out there, I am always happy to analyse any information you have and adviseyou whether it complies with thesuperannuation law.

To give you an idea of how toavoid some of these dodgyschemes, there are six things youshould always consider if you areentering into property invest-ments using your self-managedsuperannuation fund.

Does your SMSF trust deedallow property investments?Your SMSF’s trust deed is thefirst thing you should considerbecause it provides details ofwhat you, as trustee of yourSMSF, can and can’t do.

The other important documentthat lists what a trustee can doand can’t do is, of course, superlegislation, Superannuation Industry (Supervision) Act 1993.Even if it is allowed under SISA,an SMSF trustee cannot do some-thing if it is not also permitted bythe SMSF’s trust deed.

So if your SMSF is going toneed to borrow money to buy aproperty, you will need to ensureyour SMSF’s trust deed allows forsecurity to be placed over its as-sets and allows for a separatetrust to hold the asset while theloan remains outstanding.

Is property part of thestrategy?There is nothing in the Act thatrequires an investment strategyto be in writing. However, SMSFtrustees are solely responsibleand accountable for the pruden-tial management of their mem-bers’ benefits. It is the trustees’duty to make, implement and doc-ument decisions about investingand to carefully monitor the performance of those assets.

Also the SISA provides a de-fence to trustees against any action for loss or damage sufferedas a result of them making an investment.

The defence is available if trus-tees can show the investment wasmade in accordance with the in-vestment strategy formulated fortheir SMSF.

So document your SMSFinvestment strategy.

Who was the previous owner?Under the SISA, only propertiesthat meet the definition of a“business real property” can beacquired by a SMSF from relatedparties.

A BRP is any land and buildingused wholly and exclusively in abusiness. It can be residentialproperty as long as the property

was used in a business at the timethe SMSF acquired it from a relat-ed party. (For examples of BRP, re-fer to the office publication SMSFRuling 2009/1.)

You can’t use your SMSFmoney to buy the residentialproperty that you live in unlessthe property is worth less than 5per cent of the total value of yourSMSF. For most people, theirSMSF is not worth enough tomeet this requirement.

Is it market value?Under SISA, all investment trans-actions must be conducted atarm’s length.

If the SMSF and the propertyowner are related they are notarm’s length.

However, the Act allows sales ofBRP between related parties bystating that if the parties are notat arm’s length then they mustact as though they are or onterms that do not disadvantagethe SMSF.

Therefore, the price paid forproperty should always reflectthe true market value regardlessof who the buyers and sellers are.

Does your SMSF need a loan?If your SMSF needs to borrow

to buy property, the loan must bestructured exactly as stipulatedin the Limited Recourse Borrow-ing Arrangement rules under theSISA.

A separate holding trustshould be established by a quali-fied legal practitioner.

Failure to properly execute aholding trust arrangement maylead to unnecessary stamp dutyas well as having capital gains taximplications.

It is vital to get legal advice be-fore any element of the purchasetakes place. For more details onLRBA, refer to the tax office pub-lication SMSF Ruling 2012/1.

Who is going to lease it?Under SISA property bought by aSMSF can’t be leased to a relatedparty unless it meets the defini-tion of a BRP or it is less than 5per cent of the SMSF’s value.

That means any claims thatyou can use your SMSF to pay offyour mortgage are false. YourSMSF can’t purchase a residen-tial property for you to live in andlease to your SMSF unless thevalue of the property is less than 5per cent of the total value ofassets in the SMSF.

If everything is done correctlyand in accordance with the superannuation law, propertymay be a good investment forSMSFs.

If you don’t get it exactly right,not only can your SMSF faceharsh tax office penalties, it canend up paying three times theusual stamp duty and get billedfor extra capital gains tax. Monica Rule is a SPAA-accreditedSMSF specialist adviser. She has 17years of super experience gained froma 28-year career with the AustralianTaxation Office. Monica is the authorof The Self Managed Super Handbook— Superannuation Law for SelfManaged Superannuation Funds inplain English. www.monicarule.com.au

A lot to considerbefore taking theproperty plunge

super■ Monica Rule

Phone 9482 3111 Email neale.prior@wanews.com.au

From childhood we have watchedas everything our ancestorsworked for . . . was squandered ona delusionJeremiah 3.24

JEREMIAH

Their wrath willfall upon theeconomiclibertarians whofailed to shieldthem from theirown gullibility.

6 BUSINESS thewest.com.au Monday, February 17, 2014 7BUSINESS thewest.com.au

Monday, February 17, 2014