When it comes to considering what to invest in using your self managed superannuation fund (SMSF), the law sets out certain investment regulations a SMSF must comply with. Here are a number of guidelines to follow when investing using your SMSF:
Investment strategy
Given the importance of the investment process, legislation requires all trustees to formulate, document and give effect to an investment strategy for the fund.
This strategy should cover:
- The risk involved in making, holding and realising, and the likely return from, the fund's investments having regard to its objectives and its expected cash flow requirements
- The composition of the fund's investments as a whole including the extent to which the investments are diverse or involve the fund in being exposed to risks from inadequate diversification
- The liquidity of the fund's investments having regard to its expected cash flow requirements
- The ability of the fund to discharge its existing and prospective liabilities.
In general, the investment strategy should set out your investment objectives and detail the investment methods you’ll adopt to achieve these objectives.
In-house assets
A regulated superannuation fund is generally restricted from having more than 5% of the total market value of its assets invested in in-house assets. An "in-house asset" is defined in s 71 of the SIS Act to include (unless an exception applies):
- A loan to, or investment in, a "related party" of the fund
- An investment in a "related trust" of the fund
- An asset of the fund subject to a lease or lease arrangement with a "related party" of the fund.
Funds are prohibited from acquiring assets from members
One very important investment rule which has been formalised by the SIS Act is a trustee of a regulated superannuation fund must not intentionally acquire assets from members of the fund except in certain limited circumstances.
Limited exceptions to the prohibition on acquiring assets from members apply to permit a fund to acquire an asset from a member if the asset is:
- A "listed security" acquired at market value
- A “business real property" acquired at market value, where the fund has fewer than five members
- An asset acquired under a merger between regulated superannuation funds
- An asset of a kind which the regulator, by legislative instrument, determines may be acquired by any fund or a class of funds
- An "in-house asset" which, after being acquired at market value, does not result in more than 5% of the fund's assets being in-house assets.
Arm's length investment
Investments by a trustee or investment manager must be made and maintained on a strict arm's length basis, i.e. they must be at prevailing commercial or market rates. This requirement does not necessarily prevent transactions between related parties but, where permitted (e.g. subject to the in-house rules and other restrictions), they must be on an arm's length basis.
Alternatively, if the parties cannot be said to be dealing at arm's length in respect of a transaction, the terms and conditions of the transaction must be no more favourable to the other party than if they were dealing at arm's length. However, any dealing between related parties or associates should be properly documented and substantiated to withstand any scrutiny.
Charge over assets of a fund
A trustee of a regulated superannuation fund not give a charge over, or in relation to, an asset of a fund. However, limited exceptions apply for charges in relation to certain derivatives contracts that meet the conditions under the SIS Act.
Lending money or giving financial assistance to members
A regulated superannuation fund must not lend fund money, or give any financial assistance out of the fund's resources, to a member of the fund or a relative of a member.
Exotic investments – artwork and collectables
Currently there are no specific restrictions on superannuation funds investing in "exotic" investments such as artwork, vintage cars, wine or other collectables. However, such investments are likely to come under close scrutiny by the regulators to ensure they are consistent with the investment rules.
From 1 July 2011 the Government will introduce legislation to tighten the legislative standard on SMSF investments in collectables and personal assets use. Any existing SMSF holdings of such assets that cannot comply with the legislative standards will be required to be disposed of by 1 July 2016.
For more information about investing using a SMSF, contact us
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