Self Managed Super Fund (‘SMSF’) Investments
The trustees (or directors if the SMSF is a corporate trustee) of a SMSF need to carefully consider their compliance with the relevant legislation, particularly in relation to the investments that a SMSF can make.
1. What is a SMSF?
The Australian Taxation Office website explains a SMSF to be:
“Like other superannuation (super) funds, self-managed super funds (SMSFs) are a way of saving for your retirement. The difference between an SMSF and other types of funds is that, generally, the members of an SMSF are also the trustees. This means the members of the SMSF run it for their own benefit.”
2. SMSF Investments
Given that the trustees run the SMSF for their own benefit, they are also responsible for the investments chosen, the investment strategies used and the legal compliance of the SMSF.
SMSF’s can invest in practically anything (subject to certain exceptions).
There are a number of considerations that trustees need to be mindful of when considering their investment options. Specifically, trustees need to ensure that:
(a) the SMSF is correctly set up and legally compliant;
(b) the SMSF trust deed provides investment powers to the trustees;
(c) investments comply with the investment strategy provided in the SMSF trust deed; and
(d) they comply with the relevant legislation including the various tax provisions and the Superannuation Industry (Supervision) Act 1993 (Cth) (‘Act’).
3. SMSF Investments in property
SMSF’s can invest in property if the investment:
(a) satisfies the ‘sole purpose test’;
(b) is not acquired from a ‘related party’;
(c) is not lived in by member or related party;
(d) is not rented by member or related party; and
(e) does not breach the ‘in-house asset’ rule.
What is the ‘sole purpose test’?
The Act requires all SMSF funds to be maintained solely for the ‘core’ and ‘ancillary’ purposes of providing benefits to the members after retirement or to the legal representative/s of the members in the event of the member’s death.
Acquisition from a ‘related party’
The Act prohibits a SMSF from intentionally acquiring an asset from a ‘related party’ (ie a member, relative of a member, related trust or company) except where the asset is:
(a) a listed security (eg stock exchange) acquired at market value;
(b) a business real property (eg freehold, leasehold, interest in Crown land etc used exclusively for business) acquired at market value;
(c) acquired under a merger between regulated superannuation funds; or
(d) determined by the Australian Taxation Office (‘ATO’) to be allowed to be acquired.
The ‘in-house asset’ rule
If a SMSF does invest in a related party asset at market value, the trustees need to ensure compliance with the ‘in-house asset’ rule which requires that the value of the asset does not exceed a certain percentage (generally 5%) of the value of the fund.
4. SMSF investment in business
SMSF’s can invest in businesses if the investment complies with the Act and:
(a) satisfies the ‘sole purpose test’;
(b) is not acquired from a member or related party (other than at market value); and
(c) does not breach the ‘in-house asset’ rule.
Trustees considering investing in businesses need to exercise caution as there are a number of further considerations that need to be taken into account, particularly as failure to comply with the Act can result in civil and criminal consequences.
5. SMSF investment in collectables and personal use assets
There are specific rules in relation to a SMSF making, holding and realising investments involving:
(e) coins or medallions;
(f) postage stamps or first day covers;
(g) rare folios, manuscripts or books;
(k) recreational boats;
(l) memberships of sporting or social clubs; or
(m) assets ordinarily used or kept mainly for personal use or enjoyment (not including land).
Investing in collectables and personal use assets requires specific and careful consideration as failure to comply with the investment rules under the Act (and related Regulation) could result in heavy monetary penalties.
How we can help
Operating a SMSF is a complex, confusing and often daunting task. It is important to ensure that your SMSF, and the way that you operate your SMSF, complies with the relevant legislation as failure to comply can result in serious civil and criminal consequences.
We can assist you with every aspect of your SMSF matter.
Here at Ramsden Lawyers our Commercial Law department has the necessary expertise and experience to deal with any SMSF matter.
By Julian Barlcay, Lawyer.