Self Managed Super Fund Investment Rules | What can my SMSF invest in?

The Sole Purpose (or core purpose) of your SMSF must be to provide retirement benefits to the members of the fund on retirement or benefits to a deceased members dependants or estate. Any investment made or general decision made in the fund that doesn't pass this broad "Sole Purpose Test" will breach of the Superannuation Industry (Supervision) Act 1993 ('SISA') and may result in the SMSF being "non compliant". A Sole Purpose Test breach is a fairly broad brush and isn't applied often, but  it sets the framework for a trustees mindset when investing and carrying out operations in the SMSF.


Investment Rules / Restrictions

Investment rules for SMSF's are in place and regulated by the ATO to limit the risks that SMSF fund members are exposed to, to maintain / maximise retirement savings. The rules also aim to ensure that SMSF's make investment decisions with the sole purpose of generating retirement benefits for members (rather than providing current day support, eg. for a failing business). Basically a SMSF can invest in any asset, subject to the below requirements being met, which cover the type of asset, the way or from who the asset is purchased, how the asset is funded and the impact the asset has on the SMSF's investment strategy.

Loans or financial help to members or a member's relative
You can't lend money or provide direct or indirect financial help from your SMSF, to a member, or a member's relative.

Borrowings
You can borrow money in very limited circumstances: 
   a. borrowing money for a maximum of 90 days to meet benefit payments due to members or to meet and outstanding surcharge liability. The borrowings can't exceed 10% of your fund's total assets  
   b. borrowing money for a maximum of seven days to cover the settlement of security transactions if the borrowing does not exceed 10% of your fund's total assets. You can only borrow to settle security transactions if at the time the transaction was entered into it was likely that the borrowing would not be needed
   c. Borrowing using a Limited Recourse Borrowing Arrangement click here for more details

Acquisition of assets from a related party
You can't acquire assets for your SMSF from a related party of your SMSF. However, like everything, there are exceptions to the rule, where:
   a. the asset is a listed security (eg. shares or units on an approved stock exchange) and the asset is acquired at market value
   b. the asset is business real property and acquired at market value
   c. the asset is an in house asset, but the level of your SMSF's in house assets does not exceed 5% of the total assets of the SMSF, or is an asset specifically excluded from being an in house asset.

A related party of your SMSF covers all members of your SMSF and associated, and all standard employer-sponsors of your SMSF and their associates.
An associate of a particular member of an SMSF includes the following:
   a. every other member of your fund
   b. the relatives of each member
   c. the business partners of each member
   d. any spouse or child of those business partners, any company a member (or the members and / or their associates) controls or influences and any trust the member (or the members and / or their associates) controls.

Associates of a standard employer-sponsors include business partners and companies or trusts the employer controls (either alone or with other associated), or companies and trusts that control the employer.
A standard employer-sponsor is an employer who contributes to a super fund for the benefit of a member, under an arrangement between the employer and the trustee of a SMSF.
Business real property generally relates to land and buildings used wholly and exclusively in a business.
If a business real property is used in a primary production business, such as a farm, it can still meet the test of being used wholly and exclusively in a business, if an area of land, no more than two hectares, contains a dwelling that is used for private or domestic purposes. However, the main use of the whole property can't be for domestic or private purposes.

In House Assets
An in house asset is a loan to, or an investment in a related party of your SMSF, or an investment in a related trust of your SMSF. An asset of your SMSF that is leased to a related party is also an in house asset. In general, as a trustee you are restricted from lending to, investing in or leasing to a related party of your SMSF more than 5% of your SMSF's total assets.
There are some exceptions, including business real property that is subject to a lease between your SMSF and a related party of your SMSF. There is a limited exemption for certain investments in related non geared trusts or companies.

Investments need to be made and maintained at arm's length
Any time your SMSF makes an investment, it needs to be made and maintained on a strict commercial basis. This is referred to as an investment at arm's length. The purchase and sale price of fund assets should always reflect a true market value for the asset.

Income from assets held by your fund should always reflect a true market rate of return.

Investing in Business Real property
You need to make sure the level of investment in business real property still meets the investment strategy of your SMSF, including diversification of assets, liquidity and maximisation of member returns in your SMSF.


Investment Strategy

You need to prepare and implement an investment strategy for your SMSF and review it regularly. The investment strategy needs to reflect the purpose and circumstances of your SMSF and consider the following:    

  • investing in a way to maximise member returns taking into account the risk associated with the investment

  • diversification and the benefits of investment across a number of asset classes (eg. shares, property and fixed deposits) in a long term investment strategy

  • the ability of your fund to pay benefits as members retire and pay other costs incurred by your fund

  • the needs of members (eg. age, income level, employment pattern and retirement needs).

The investment strategy should set out your investment objectives and detail the investment methods you'll adopt to achieve these objectives. You need to make sure all investment decisions are made according to the investment strategy of your SMSF. Please seek professional assistance if in doubt. You should view your SMSF investment strategy as a fluid document.


 

 Investment Checklist

 

  1. Make sure the SMSF complies with the sole purpose test at all times while the SMSF is in existence, including when investing fund assets and paying benefits upon retirement of members.

  2. Make sure you develop an investment strategy that you regularly review

  3. Ensure your investment strategy takes into account the retirement goals of members

  4. Take into consideration the risks involved in certain investments

  5. Take into consideration what bills your SMSF has to pay and allow enough cash to meet these expenses (it is also good practice to have at least 2-3 years of cash for the payment of a pension)

  6.  Consider diversifying your SMSF's investments

  7. Have a sperate bank account for your SMSF

  8. Make sure that your SMSF's ownership of its investments is assured. Make sure the assets are in the correct name of the fund

  9. Make investment decisions that will provide for your retirement

  10. Don't mix your SMSF money / assets with other money

  11. Don't have the SMSF assets in another entities name

  12. Don't provide financial assistance to members or relatives members

  13. SMSF assets are not for your or a related parties personal use

 

 

 

 

 

 

 

 

Copyright Self Managed Super Fund Accountants © | Disclaimer | Site Map