Managed investment schemes and self-managed superannuation funds
The land banking schemes investigated in this inquiry featured both
direct and indirect property investment—21st Century Group investors
and some Market First investors invested through options agreements (indirect
property investment), while some Market First investors invested through
off-the-plan contracts of sale (direct property investment). Direct property investment
is exempted from the Corporations Act but it is unclear whether options
agreements in land banking, as an indirect property investment, could be
regulated under the Corporations Act.
In this chapter, the committee looks at ASIC's current attempts to
establish the status of options agreements in land banking schemes, as a form
of indirect property investment, and whether they can be captured under the
Corporations Act. The committee also examines the use of self-managed
superannuation funds as a vehicle for property investment.
Managed investment schemes
ASIC first became aware of potential problems with land banking schemes
offering options to purchase in mid-2014. It commenced investigations into
these schemes, which are (in part) aimed at determining whether the options
agreements central to some land banking schemes fall under the Corporations
Act. On 3 June 2015, the Senate Economics Legislation Committee
questioned ASIC about complaints raised in media reports relating to land
banking schemes. ASIC indicated that, while land banking schemes did not fit
neatly into ASIC's jurisdiction, it was conducting active inquiries in relation
to this issue.
Two months later, on 7 August 2015, ASIC announced that it had initiated
court proceedings in the Federal Court of Australia against companies
associated with Mr McIntyre and the 21st Century Group. They
related to their promotion and sale of interests to investors in five land
banking schemes in Victoria and Queensland. As noted in chapter 2, the five
projects are Botanica; Secret Valley Estate; Oak Valley Lakes Estate &
Resort; Bendigo Vineyard Estate & Resort; and Melbourne Grove Estate.
ASIC’s media release outlined the case:
ASIC understands that there are over 100 investors in the
schemes, which have been promoted to investors, including through seminars, by
entities associated with Mr McIntyre's 21st Century Group. Companies associated
with Mr McIntyre and the 21st Century Group are also the developers of the
schemes (development companies).
These proceedings are a litmus test for whether ASIC has the regulatory
powers required to regulate certain land banking schemes and protect affected
investors under the Corporations Act. ASIC argued that the land banking schemes
in question fall within the Corporations Act as the investments are actually
unregistered managed investment schemes; or
a type of financial product (that is, options to purchase
If the Federal Court accepts ASIC's arguments about the legal nature of
the land banking schemes, the 21st Century Group would be required
to have Australian financial services (AFS) licences to market the schemes.
Financial advisers who give advice on financial products must satisfy many
obligations under the Corporations Act, including the Future of Financial
Advice (FOFA) requirements in Part 7.7A of the Corporations Act, because they
are providing a 'financial service'. The key elements of the FOFA reforms
amendments to the conduct obligations for financial advisers,
including an obligation to act in the client's best interests and to prioritise
the client's interest when giving personal financial product advice (previously
advisers were required to have a reasonable basis for advice);
a prospective ban on conflicted remuneration, including
commissions and volume-based payments;
a requirement to send an annual fee disclosure statement to
clients with ongoing fee arrangements;
a requirement that advisers obtain their client's consent every
two years to continue the ongoing fee arrangements (the 'opt-in' requirement);
enhanced licensing and banning powers for ASIC.
In this case, ASIC would have the power to ensure that these investments
fulfil the obligations on financial services providers in the Corporations Act,
such as having dispute resolution systems in place and fulfilling disclosure
requirements with investment documents. ASIC made the point that there are
additional obligations that managed investment schemes are required to meet:
If the land banking scheme is a managed investment scheme,
there are strict legal requirements that must be met, including giving
investors a product disclosure statement (PDS). A PDS must include information
about the scheme's key features, fees, commissions, benefits, risks and
complaints handling procedure.
Should the land banking schemes be recognised as a managed investment
scheme, strict regulations would apply to the scheme. For example, the scheme
could not operate without a responsibility entity (RE), which must be a public company
that holds an Australian financial services licence (ASFL) authorising it to
operate a managed investment scheme.
One of the duties of an RE is to hold scheme property on trust for scheme members.
In exercising its powers and carrying out its duties, the RE of a registered
scheme must act honestly and exercise the degree of care and diligence that a
reasonable person would exercise if they were in the responsible entity's
position. An RE must also, among other obligations, act in the best interests
of the members and, if there is a conflict between the members' interests and
its own interests, give priority to the members' interests.
An officer of the RE of a registered scheme is under similar statutory
As the case has proceeded through the Federal Court, the 21st
Century Group consented to ASIC's interlocutory application and Deloitte were
appointed provisional liquidators of the development companies. Deloitte were
scheduled to provide a report as to the affairs of the companies by 15 December
2015. On 3 December 2015, the Federal Court adjourned and re-listed
the directions hearing for 5 February 2016.
On that day, the Federal Court re-listed the matter for a further hearing on 10 March 2016.
Even if the Federal Court accepts ASIC's arguments, it does not follow
that all land banking schemes, which have come to the attention of the
committee (or any future schemes), would also be defined as financial products.
Whether a scheme is captured by the Corporations Act will depend on the
particular details of the scheme. As ASIC submitted:
While ASIC does not regulate direct property investment, ASIC
considers that land banking schemes, depending on the particular scheme,
may be a managed investment scheme and/or a financial product and that the
promoters of these schemes should therefore hold an Australian financial
services licence and register these schemes with ASIC.
There are likely to be additional opportunities to test the application
of the Corporations Act to land banking schemes in the near future. ASIC told
the committee that investigations are continuing into schemes promoted by
Market First, in addition to the current proceedings against 21st
Century Group and Mr McIntyre.
Should the Federal Court not accept ASIC's arguments and decide as part
of the final orders that the land banking schemes are not a financial product
under the Corporations Act, the comprehensive licensing, conduct and disclosure
regime covering financial services in chapter 7 of the Corporations Act will
not apply to those schemes.
Self-managed superannuation funds (SMSF)
ASIC informed the committee that approximately 60 per cent of investors
who invested in land banking schemes did so through self-managed superannuation
As many investors in land banking schemes used a SMSF, the committee is
particularly interested in the regulatory regime for such funds.
While SMSFs are primarily regulated by the Australian Taxation Office,
ASIC's role in relation to SMSFs is to regulate the 'gatekeepers' who provide
advice on SMSFs including financial advisers, accountants, SMSF auditors and
providers of products and services to SMSFs.
These services are regulated under the Corporations Act and the Superannuation
Industry (Supervision) Act 1993 (SIS Act).
Investing through an SMSF
In order to establish an SMSF, a trust must be created specifying the
appointment of trustees, consideration of assets, identifiable beneficiaries
and the intention to create a trust. Once an SMSF is established but before an
SMSF can make an investment, the SMSF must have in place an investment strategy
(the trust deed of a particular SMSF may dictate in which assets a fund can
The investment strategy sets out the fund's investment objectives and specifies
the type of investments the fund can make; the SMSF must make investments
within the framework of the fund's investment strategy.
Although there is no legislative requirement for a person to seek advice
from a professional before deciding to establish an SMSF, ASIC noted that
people will usually seek assistance at some point in the process:
There is no requirement that a person seek advice before
deciding to establish an SMSF. However, the engagement of professionals at some
point is generally necessary in order to either establish the SMSF, seek advice
on the type of investments to make or prepare annual financial statements. An
SMSF auditor must be engaged to conduct an audit on the SMSF's financial
statements and compliance with the superannuation laws each year.
As a general rule, an SMSF may make any type of investment provided it
is made on a commercial 'arm's length' basis and accords with the SMSF's
investment strategy. While there are some restrictions in relation to lending
money to relatives and borrowing to invest (with the exception of limited
recourse borrowing arrangements), there are no restrictions on a person using
their SMSF to invest in products or schemes promoted at investment seminars.
Similarly, there are no regulatory legal impediments to stop a person investing
in options in a land banking scheme through an SMSF.
Investing in property or options in
land banking schemes and SMSFs
Unlike advice on property investment, advice intended to influence a
person to acquire, vary or dispose of a superannuation interest within the
meaning of the SIS Act is financial product advice under the Corporations
Act. Thus an adviser giving such advice must have an AFS licence.
For example, a spruiker who recommends to seminar attendees investing in
property through establishing an SMSF may be providing financial product advice
and should hold an AFS licence.
Through the work of a taskforce established in 2012, ASIC has been
targeting property spruikers who break the law by providing unlicensed
financial advice about SMSFs.
ASIC launched legal proceedings in November 2014 against Park Trent Properties
Group Pty Ltd (Park Trent) that, by the time of the trial in June 2015,
had advised over 860 people to establish and switch funds into an SMSF to
purchase investment property.
In November 2014, when proceedings against Park Trent commenced in the
Supreme Court of NSW, ASIC Commissioner Mr Greg Tanzer commented:
Collectively, Australians hold over $1.85 trillion worth of
assets in superannuation funds, with $557 billion held in SMSFs. It is
important when making decisions regarding superannuation to consider obtaining
appropriate advice from an authorised financial adviser.
Dealing with an authorised adviser affords specific
protections under the law, such as acting in the best interests of clients, a
duty to avoid conflicts of interest and providing access to dispute resolution
Park Trent had been promoting the use of SMSFs for property investment
to attendees at seminars and to people who were visited on 'home visits' by
Park Trent employees. Park Trent's business model was dependent on:
...persuading relatively unsophisticated investors of the
virtues of using their superannuation accounts to purchase investment
properties and to establish SMSFs (at considerable expense) to enable the
purchase to proceed.
In an affidavit sworn during the hearing, one of Park Trent's employees
stated that the Property Investment Analysis was developed by a company called
The program, which could be purchased by anyone for a fee, was designed to
analyse the capital growth, cash flows and rates of return on investment
properties, taking tax implications into account. Park Trent showed the
Property Investment Analysis to clients who expressed interest in investing in
a property through an SMSF, describing it as an aid 'to influence the
individual in coming to a decision to adopt the strategy that's being put
forward in the document'.
The Supreme Court of NSW handed down final orders in ASIC's action
against Park Trent on 27 November 2015.
The court found that Park Trent had unlawfully carried on an unlicensed financial
services business for over five years by providing advice to clients to
purchase investment properties through an SMSF. It made the following orders
against Park Trent:
a permanent injunction restraining Park Trent from providing
unlicensed financial product advice to clients regarding SMSFs; and
a requirement that Park Trent post a notice on its website
outlining the orders made against it.
There are similarities between the business models of Park Trent and the
land banking schemes promoted by 21st Century Group and Market
First. Many investors in land banking schemes invested through an SMSF.
There are two possible breaches which may have occurred in the case of
land banking schemes: firstly, depending on the advice given at the investment
seminars, the spruikers may have provided financial product advice in
recommending that attendees invest through an SMSF and, as such, should have
held an AFS licence. Given the spruikers did not hold an AFS licence on the
assumption that they were only providing 'education', not financial advice,
this would have been a breach of the Corporations Act. It is difficult for the
committee, on the evidence received, to have a view on whether such a breach
The second possible breach would have occurred after attendees were
referred to accountants and financial advisers in order to establish their SMSF
and invest in the land banking scheme. Financial advisers providing advice on
the establishment of, and the disbursement of funds from, an SMSF would
definitely be providing financial product advice. Even before the FOFA reforms
commenced, the Corporations Act required financial product advice to be
appropriate and consider the client's best interests. It is highly unlikely
that advice to establish an SMSF and invest almost all of a retail client's
funds into one highly risky product, such as a land banking scheme, would meet
the appropriateness requirements for financial product advice, particularly
when the SMSF would have a low balance.
In this regard, the committee refers back to the evidence produced by
some investors cited in Mr McIntyre's submission especially references to
people investing 'the majority' or 'most' of their superannuation in land
The committee also notes that Ms Monka invested 90 per cent of her savings
(around $60,000) through an SMSF in the Moira Park Green City development in
She did so after her own accountant advised that he was not in a position to
advise her or establish an SMSF.
Although her SMSF now has very limited funds, Ms Monka is forced to pay
sizeable fees annually to comply with the requirements under superannuation
laws for financial statements.
As such, Ms Monka is paying a substantial portion of her remaining funds in
fees every year.
Such a commitment to one asset class is contrary to sound financial advice,
which advocates diversification as a means of reducing risk.
In July 2015, ASIC released guidance to advisers who provide
personal advice to retail clients about SMSFs, which stated:
In many cases, a recommendation for a retail client to set up
an SMSF with a starting balance of $200,000 or below is unlikely to be in the
client's best interests. The costs of establishing and operating an SMSF with a
balance of $200,000 or below are unlikely to be competitive, compared to a fund
regulated by the Australian Prudential Regulation Authority (APRA). Therefore,
the client may not be in a better position when compared to using an
APRA-regulated superannuation fund.
Where advice is provided to establish an SMSF with a low
balance, we would expect the advice to clearly set out:
the circumstances that influence the adviser to believe the client is
likely to end up in a better position, despite the SMSF having a low starting
consideration of whether the SMSF's intended investment strategy is
appropriate and viable
the reasons why setting up and operating an SMSF is in the best
interests of the client.
Compliance tip: We are likely to look more closely at
advice to establish an SMSF, to consider whether the advice complies with the
best interests duty and related obligations, if the starting balance of the
SMSF is below $200,000.
It should be noted that, based on her own experience, Ms Monka
recommended that SMSFs should be banned for unsophisticated investors with less
than $500,000 in funds and that establishing an SMSF should only take place
after advice and sign-off from a licensed financial adviser.
Removal of the 'accountant's
The regulatory regime for accountants providing advice on establishing an
SMSF is currently more complicated than that for financial advisers. A person
who carries on a business of providing financial product advice about an SMSF
must hold an AFS licence and meet the obligations of providing financial
product advice under the Corporations Act (described earlier). However, a
number of licensing exemptions do apply, including for a 'recognised
accountant' providing advice to establish or windup an SMSF.
This exemption is colloquially known as the 'accountant's exemption',
and allows accountants to establish an SMSF without satisfying the key elements
of the FOFA reforms, such as the obligation to act in the client's best
interests and the ban on conflicted remuneration. However, from
1 July 2016, accountants providing advice on SMSFs must be licensed
under the Corporations Act. The removal of the accountant's exemption will have
a positive effect on consumer protection in the SMSF sector, as ASIC
The effect of this change will mean that all advice to
establish or windup an SMSF will fall within the AFS licensing framework and
will also be subject to other obligations such as the best interest's duty and
the requirement to provide a Statement of Advice.
The rationale behind the accountant's exemption was that accountants, as
an established profession, were required to meet high standards to obtain their
qualifications and should not be required to meet the obligations financial
advisers were required to satisfy under the Corporations Act. The involvement
of accountants in the promotion of a number of schemes investigated by this
committee, including in relation to land banking schemes and in the separate
inquiry into forestry managed investment schemes, is evidence that accountants
should be required to meet the same regulatory standards when providing
financial product advice on SMSFs. As such, the committee considers that the
removal of the accountant's exemption for SMSF advice is long overdue.
Armed with the evidence in this report, investors in land banking
schemes may decide that it is prudent to seek advice from a licensed financial
adviser (who is listed on ASIC's financial advisers register) as to whether
their SMSF continues to be suitable for their circumstances.
The courts are yet to decide whether some of the land banking schemes
offering options are managed investment schemes or financial products. Should
the courts find that they are, the investor protection regime, which has been
significantly strengthened in recent years, will apply. If not the schemes
remain outside this regime and investors will rely on the Australian consumer
law and state and territory laws to safeguard their interests.
Investors who received advice to invest in land banking schemes through
a self-managed superannuation fund have some protections under the Corporations
Act. ASIC is aware of such activity and has taken action in the Trent Park
The committee is concerned about the use of SMSFs to invest in land
banking schemes, especially where a substantial proportion of the funds are
invested in such schemes. The committee contends that much greater publicity
should be given to the injudicious use of self-managed superannuation funds and
that all gate-keepers in the financial industry—financial planners, accountants,
lawyers, media commentators and regulators—should make a concerted effort to
educate investors on the pitfalls of doing so.
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