Four considerations when making investment decisions for your self-managed superannuation fund (SMSF)

As the landscape of retirement planning evolves, individuals seek greater control and flexibility over their financial futures. For many, self-managed superannuation funds (SMSFs) offer an enticing avenue to tailor their retirement investments to personal preferences, goals, and overall investment strategy. However, this autonomy comes with its own challenges to remain compliant with government regulations and create value for their retirement funds.

To help make investment decision making easier, we have compiled four key considerations that will impact your SMSF when selecting investments.

1. The ‘sole purpose’ test

The Superannuation Industry Supervision Act (SIS Act) states that all superannuation funds including SMSFs must be maintained solely to provide benefits for your retirement or provide benefits to your dependents upon your death. This is called the ‘sole purpose’ test, and the consequences can be quite serious if your fund does not pass. This may include losing the fund’s concessional tax treatment or other penalties for trustees.

A simple rule of thumb is that superannuation trustees must make decisions in the best interests of their fund’s members. If you make investment choices with the view to obtain a financial benefit outside of an increased return to the fund, your SMSF will likely not meet the requirements of this test.

2. Ensure assets are held in the correct name

As a trustee, it is your responsibility to ensure that fund assets are kept separate from your personal or business assets. When making investments, it is important to ensure the asset clearly shows legal ownership as the fund. For example:

  • John Smith as trustee for Smith Super Fund, or;
  • Smith Pty Ltd as trustee for Smith Super Fund.

Occasionally, you may find yourself in a situation where an asset cannot be held specifically in the superannuation fund’s name. When this occurs, ownership must still be clearly established. This can be done through a variety of measures, such as executing a caveat or creating a declaration of trust, confirming ownership of the asset is not personal, but within the fund.

3. Regulatory restrictions for investments

A SMSF trustee cannot decide to invest in just any type of asset they choose – there are very specific rules governing what types of investments are permitted, detailed in the SIS Act and regulations. Generally, this includes:

  • SMSF’s cannot buy assets from their members or other related parties
  • SMSF’s cannot lend money to their members or other related parties
  • SMSF’s cannot borrow or loan money.

There are, however, some exceptions to these rules – the details of which can be difficult to navigate. When unsure, it is important to speak with your BDO advisor to confirm what is and is not allowed.

It is also very important to remember that when making investments, these need to be made on commercial terms, or on an ‘arm’s length’ basis. The purchase and sale price of the assets must reflect actual market value and any income derived from fund investments must be in line with the market rate of return.

4. Remember your investment strategy

Your SMSFs investment strategy is your road map for choosing investments that are consistent with your investment objectives and retirement goals. It should set out why and how you have chosen to invest your retirement benefits to meet these goals. It is important to review this strategy on a regular basis, and it should be documented in writing.

The regulations for SMSFs specify that your strategy must also consider the following factors:

  • The risks involved in making, holding, and realising investments, as well as the likely return from your fund’s investments regarding its objectives and cash flow requirements
  • The composition of your fund’s investments, including the extent to which they are diverse (such as investing in a range of assets and asset classes), and the risks of inadequate diversification
  • Liquidity of the fund’s assets - that is, how easily they can be converted to cash to meet fund expenses, such as the cost of managing the fund and income tax expenses
  • The fund’s ability to pay benefits, such as when members retire and require a lump sum payment or regular pension payments, along with other costs it incurs
  • Whether the fund will hold insurance (such as life, or permanent or temporary incapacity insurance) for each SMSF member.

How can BDO help?

It is important to seek professional advice when formulating your SMSF investment strategy in order to ensure all documentation is comprehensive and effective. Our advisors are also able to discuss these four aspects of your SMSF investments with you before they are made, to ensure your fund stays out of trouble.

If you require any assistance, the BDO Superannuation team is here to help. Contact your local adviser today to find out more.

The information contained in this publication is purely factual in nature and does not take into account your personal objectives, financial situation or needs. It is provided as an information service only and does not constitute financial product or other professional advice and should not be relied upon as such. Before making any investment or financial decisions you should consider your particular objectives, and financial circumstance or needs. Where information relates to a particular financial product you should obtain and consider the relevant Product Disclosure Statement and obtain advice from a financial adviser before making any decision. If you do require financial advice, please contact the relevant BDO member firms in Australia who will be able to assist you in their capacity as an Australian Financial Services licensee. BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not give any warranty as to the accuracy, reliability or completeness of information contained in this publication nor do they accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it, except in so far as any liability under statute cannot be excluded.
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