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:
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:
In general, the investment strategy should set out your investment objectives and detail the investment methods you’ll adopt to achieve these objectives.
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):
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:
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.
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.
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.
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.
This article is intended to provide general information only, and is not to be regarded as legal or financial advice. The content is based on current facts, circumstances, and assumptions, and its accuracy may be affected by changes in laws, regulations, or market conditions. Accordingly, neither Azure Group Pty Ltd nor any member or employee of Azure Group or associated entities, undertakes responsibility arising in any way whatsoever to any persons in respect of this alert or any error or omissions herein, arising through negligence or otherwise howsoever caused. Readers are advised to consult with qualified professionals for advice specific to their situation before taking any action.