It’s a legal requirement for an SMSF to have an investment strategy. Your fund’s compliance with this strategy is one of the things that is checked as part of your annual SMSF audit.
It’s the responsibility of the SMSF Trustee to develop an investment strategy to set up an SMSF. The trustees are also responsible for ensuring that all SMSF investment transactions are made following the strategy.
Major considerations when developing a self-managed super fund investment strategy include:
- The benefits of a diversified investment strategy to reduce risk. Investing in different types of assets (e.g. fixed interest, property and shares) helps to spread your risk. If one sector isn’t performing as strongly, others may be able to compensate. You’ll be less exposed to downturns or flat periods in a single asset class.
- The personal circumstances of members (e.g. their age, financial situation and risk profile).
- The liquidity needs of the fund and how easily its investment assets can be converted into cash. For example, to pay for the retirement benefits of the SMSF members.
- The insurance needs of fund members. For example, life insurance covers the debts of each fund member.
The investment strategy should be reviewed regularly to ensure that returns are meeting objectives and member needs.
Are there any restrictions on SMSF investments?
Yes.
All the investments made by your self-managed super fund must be what is known as “arm’s length” transactions. This means that you generally can’t:
- Buy assets from your SMSF fund members, their relatives or related parties (with a few exceptions, see the next heading in this article). Related parties include business partners of any fund members, as well as any companies or trusts that members may be involved with. It also includes any employers who may contribute to the SMSF on a member’s behalf).
- Lend money to SMSF fund members, their relatives or related parties (with a few exceptions, see the next heading in this article). Any other loans that may be made by your self-managed super fund must be on commercial terms and in the best interests of members. They must also comply with the fund’s investment strategy.
All your SMSF investment transactions must reflect the true commercial values of asset purchases and sales.
Your fund also cannot borrow money to invest. If you need to arrange funds for SMSF property investment, you need to set up a trust under a limited borrowing recourse arrangement. Legal ownership of the investment property will remain with the trust until the investment property loan is repaid. It is then transferred to your self-managed super fund.
Your fund also cannot buy any collectibles or personal use assets that are going to give any present-day benefit to members. For example, cars or boats. This is because a self-managed super fund must meet the sole purpose test of providing for members’ retirement.
What are the exceptions to acquiring SMSF assets from related parties?
Certain assets can be acquired by your self-managed super funds, provided they are bought at market value. These assets include:
- Listed securities (for example, shares)
- Business land and property
- In-house assets that are less than 5% of your SMSF’s total value. These in-house assets include loans to family members
What if I don’t comply with investment restrictions with my SMSF?
If you don’t comply with self-managed super investment restrictions, there can be significant penalties imposed by the Australian Taxation Office. You can lose your SMSF tax concessions and the trustees of your fund can even be disqualified and prosecuted.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.