- What Can A SMSF Invest In?
- What are the restrictions?
- What rules must trustees follow?
- Choosing an investment option (Investment choice)
- What assets do super funds actually invest in?
- What investments are not permitted in a SMSF?
- What kind of assets are not allowable investments?
- What about if the fund lends me money and I pay interest?
- What if the fund lends money or invests in my related trust?
- What is a ‘relative’ for the purposes of the SIS Act?
- What if I already own a geared trust?
- What assets can I buy with SMSF?
- How to buy Property in Super
- Why are there restrictions?
- Need help with your SMSF?
What Can A SMSF Invest In?
As the trustees of the fund, you have the power to make investment decisions.
You have a great deal of freedom to select investments that you think will suit the needs of your fund and its members.
However, there are a number of rules that you must abide by.
Please read on to find out what restrictions may apply to your investments.
What are the restrictions?
Investments must be for the ‘sole purpose’ of providing retirement benefits for the members of the fund.
Members, relatives or associates of the trustees must not gain any immediate benefit from the fund’s assets or activities.
So, for example, any property owned by the fund cannot be used by the members or their families, even if rented out at a market rental.
What rules must trustees follow?
Trustees owe a fiduciary obligation to beneficiaries to act in their best interests and handle the trust in accordance with the trust deed.
- Trustees must act responsibly, honestly and in the best interests of all members.
They must invest with care, skill and diligence.
- Trustees must make investments at ‘arm’s length’ and on commercial terms. Any assets bought and sold must be at full market value.
Choosing an investment option (Investment choice)
Income received from an investment must be the true market rate of return. Any interest paid on limited recourse borrowings must be at market rates for similar types of loans.
What assets do super funds actually invest in?
Fund investment portfolios can include many of the following investments:
- Cash management accounts.
- Term deposits.
- Managed funds (Australian and international).
- Listed Australian shares.
- Listed unit trusts (property, investment).
- Listed investment companies.
- Overseas listed shares.
- Residential property.
- Commercial property.
- Industrial property.
- Property purchased with borrowed funds (limited recourse borrowing).
- Property partnerships with non-related parties.
- Shares in private companies with non-related parties.
- Options, warrants, CFDs and other “exotic” investments – these assets are permissible with the proper investment strategy.
Do you need finance for your SMSF?
We know which banks will approve loans for Self Managed Super Funds, making it easy to implement your investment strategy.
Please enquire online and our specialist mortgage brokers will help you get the loan you need for your SMSF.
What investments are not permitted in a SMSF?
The Superannuation Industry (Supervision) Act 1993 prohibits certain types of investments.
- Cannot lend money or provide any financial advantage to a member, a relative or associate of a member.
- Cannot borrow except in limited circumstances.
- Must limit investments in, or loans to, ‘related parties’ to 5% of the market value of the fund.
- Cannot buy assets from a member or a relative or associate of a member except for business real property.
The exemption for off-market transfers of listed securities and widely held managed funds no longer applies. The new rules state that where a market exists, the purchases must be made on market.
What kind of assets are not allowable investments?
Assets that meet the above conditions such as:
- Geared unit trusts.
- Investments in a related employer sponsor (i.e.
the fund member’s employer).
- Loans to a member.
- Properties which are mortgaged on a full recourse basis.
- Most artwork and collectibles.
What about if the fund lends me money and I pay interest?
Many people think that they can simply borrow money from their fund and pay back the money with an interest rate that is higher than the banks.
Although this may sound like a suitable arrangement, it is definitely not allowable, not to mention incredibly risky!
What if the fund lends money or invests in my related trust?
There is actually nothing wrong with the fund lending money or making investments, as long as it is in accordance with the stated investment strategy.
However, the fund cannot invest in related parties.
Under the Superannuation Industry (Supervision) Act 1993 A related party is widely defined to include the fund members, a standard employer-sponsor of the fund or an associate of either.
An associate can be the relative or spouse of a member and any companies or trusts that they control.
For example, Tim and Judy are the trustees and members of their SMSF.
Tim works for his own company, and the company makes super contributions to Tim’s SMSF. These contributions are given to Tim in his capacity as trustee, therefore the company is a ‘standard employer-sponsor’ and will be a related party.
However, if Tim’s company were to make super contributions to Tim’s SMSF in his capacity as a member then the company will be an ‘employer-sponsor’ and not a related party.
What is a ‘relative’ for the purposes of the SIS Act?
Like under most legislation, the term ‘relative’ includes the following people:
There are many technical aspects to what is classified as a related party, so it is best to get specific up-to-date advice on whether your investment to that entity will be possible.
What if I already own a geared trust?
Many years ago these investments may have been allowed.
However now they are losing their ‘grandfathered’ protected status and cannot be added to.
You cannot reinvest a distribution or a dividend from the investment at all.
You will also most likely be forced to sell the investment in the near future if further changes are made to the law.
Do you need help with your investment strategy?
Please enquire online and our experts can help you work out an investment plan that suits your fund’s needs.
What assets can I buy with SMSF?
A SMSF can invest in a variety of assets including property and shares. But what about smaller personal assets like artwork, wine, war medals, collectibles and boats?
Technically yes, but the rules for holding these types of assets have become so strict that acquiring these assets is recommended.
How to buy Property in Super
They are also a red-flag for the ATO and your fund may be audited.
For example, artworks can be owned, but:
- They must be fully insured.
- They must be stored in a special storage location away from the owners home.
- If they are available for public viewing they must earn a market return (e.g. rent).
- If a gallery rents the artwork from you, displays it and covers the piece under its own insurance policy, you must have additional insurance in the fund’s name.
- If you hang the artwork in your business premises, you are breaking the law, even if you pay rent.
Why are there restrictions?
The types of assets that an SMSF can invest in are generally restricted because they do not meet the sole-purpose test.
All investments must be for the benefit of the fund’s members.
The regulator is concerned that these ‘non-traditional assets’ are personal purchases and the benefits cannot be extended to all members.
Need help with your SMSF?
There are many things to consider when setting up a SMSF or using it to invest.
Enquire online today to get expert advice for your SMSF.
We can help you ensure that you make the right investment decisions for your SMSF.
Note: this website is for informational purposes only and should not be substituted for professional financial or taxation advice.