Newsletter:

Super News - What you need to consider when reviewing your Self-Managed Super Fund investment strategy

05 September 2019

Pat Kelly & Lisa Philip |

The Australian Taxation Office (ATO) has announced it will soon be contacting approximately 17,700 Self-Managed Superannuation Fund (SMSF) trustees. The intention is to enquire whether their fund has adequate diversification across its investment portfolio and documentation of the investment strategy to address:

  • The diversification of fund investments
  • The risks of inadequate diversification within the context of the SMSF’s investment portfolio (for example, the risks associated with the fund's investments in a diversified portfolio of shares is likely to be lower than that of another asset class, such as cryptocurrency)
  • The making, holding, realising, and the likely return from the fund investments relating to the trustee’s retirement objectives and expected cash flow requirements
  • The liquidity of investments, allowing the fund to meet costs and pay benefits as members retire, and
  • Whether insurance cover should be held for one or more members.

To minimise the chance of receiving a call from the ATO, we have highlighted the key considerations to be aware of when reviewing your SMSF investment strategy.

The sole purpose test

When making any investment decision, SMSF trustees should consider section 62 of the Superannuation Industry (Supervision) Act 1993 (the SIS Act).

The legislation, which is generally referred to as the sole purpose test, states that SMSFs must be maintained solely to provide benefits in retirement or benefits to dependants upon a member’s death. 

Ensure assets are held in the correct name

SMSF trustees are responsible for ensuring the assets of the fund are kept separate from personal and business assets. When making investments, trustees should ensure the assets clearly identify the legal ownership of the fund, for example:

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

Occasionally, an asset cannot be held specifically in the SMSF’s name. When this occurs, ownership must still be clearly established and this can be achieved by adopting a variety of measures, such as executing a caveat or creating a declaration of trust. These will allow the fund to confirm ownership of the asset.

Restrictions on certain types of investments

SMSF trustees have restrictions on them about the type of asset they choose to acquire within the fund. In addition, the trustee must also take into account the rules of their SMSF, i.e. the Trust Deed of the fund and the SIS Act. For example:

  • SMSFs cannot acquire assets from fund members or other related parties
  • SMSFs cannot lend money to fund members or other related parties
  • SMSFs cannot borrow money (except in limited circumstances).

There are some exceptions to these rules, therefore SMSF trustees should speak with a qualified adviser before making any investment decisions within their fund.

It is also very important to remember that all investments undertaken by a SMSF 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 the fund’s investments must be in line with the market rate of return for the same or similar class on investment.

Cryptocurrency

While SMSFs are not prohibited from investing in cryptocurrencies, such as Bitcoin, the investment must:

  • Be specifically allowed for under the fund’s trust deed
  • Be in accordance with the fund’s investment strategy
  • Comply with the SIS Act and regulations.

SMSF trustees who decide to invest in cryptocurrency, should consider the level of risk of this particular investment. The trustee should then review and, if necessary, update the fund’s investment strategy to ensure the investment being considered is permitted and documented.

As noted in our newsletter on 15 July 2019…. “The ATO has completed a data matching exercise and may contact taxpayers to verify the information they have collected…SMSF trustees review their Trust Deed and Investment Strategy to ensure the documents explicitly allow the SMSF to transact in cryptocurrency.”

Property and short term holiday rentals

Short term holiday rentals like Airbnb are becoming a popular way to rent out a property. While there is nothing in the legislation that prevents a SMSF from renting the fund’s property in this way it is important the fund’s investment strategy is documented appropriately, considers the risks associated with this type of rental arrangement and the fund’s short-term and long-term liquidity and cash flow requirements.  

Need Help?

Our advisers can discuss 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 so feel free to contact your local adviser.

Featured in the Australian Financial Review 6 September 2019: Advisers urge calm as ATO threatens to fine thousands of SMSFs 
BDO Partner Mark Wilkinson was quoted in the AFR, saying trustees could consider adding an addendum to their existing investment strategy to provide further evidence they had considered diversification. "I don't think the ATO is out to catch trustees," he said. “They're simply asking ... have you thought the financial strategy through and have you got evidence to show you've taken into account the risk, liquidity and diversity of the portfolio?"

Read the full AFR article (access may be limited to AFR subscribers). 

Disclaimer: The information contained in this letter is purely factual in nature and does not take into account your personal objectives, financial situation or needs. The information is objectively ascertainable and, therefore, does not constitute financial product advice. If you require personal advice that takes into account of your particular objective, financial situation or needs, you should consult us in our licensed capacity.