Managing your self managed super fund's investments: Part 3

One of your key areas of responsibility is to manage your super fund's investments. You have certain duties and responsibilities when making investment decisions. They are designed to protect and increase your member's benefits for retirement.

Your investment strategy

You need to prepare and implement an investment strategy for your self managed super fund (SMSF) and review it regularly. The investment strategy needs to reflect the purpose and circumstances of your super fund. You will also need to take the following into consideration:

• investing in a way to maximise member returns taking into account the risk associated with the investment
• diversification and the benefits of investing across a number of asset classes (for example, shares, property and fixed deposit) in a long-term investment strategy
• the ability of your super fund to pay benefits as members retire and pay other costs incurred by your super fund 
• the needs of members (for example, age, income level, employment pattern and retirement needs).

The investment strategy should set out your investment objectives and detail the investment methods you will adopt to achieve these objectives. You will need to make sure all investment decisions are made according to the investment strategy of your super fund. If in doubt, we recommend that you seek investment advice from a professional financial planner.

SMSF restrictions

Super laws place restrictions on the types of entities your super fund can invest in or with, and the entities that your fund can acquire assets from. Investment restrictions exist because they protect fund members by making sure fund assets are not exposed to undue risks, for example a business failing.

Loans or financial help to members or a member’s relative

You can’t lend money or provide direct or indirect financial help (including the provision of credit) from your super fund to a member, or a member’s relative. For example, using super fund assets to guarantee a personal loan would contravene this investment restriction.

A member or a member’s relative means any of the following:

• a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of that individual or of his or her spouse
• a spouse of that individual or of any individual specified above

Borrowings

You can only borrow money in very limited circumstances. The circumstances include:

• borrowing money for a maximum of 90 days to meet benefit payments due to members or to meet an outstanding surcharge liability. The borrowings can’t exceed 10% of your fund’s total assets
• borrowing money for a maximum of seven days to cover the settlement of security transactions if the borrowing does not exceed 10% of your super fund’s total assets. You can only borrow to settle security transactions if at the time the transaction was entered into it was likely that the borrowing would not be needed 
• borrowing, using instalment warrants or instalment warrant like arrangements that meet certain conditions.

Acquisition of assets from a related party

You can’t acquire assets for your SMSF from a related party of your fund. However, there are limited exceptions to this rule where:

• the asset is a listed security (for example, shares, units or bonds listed on an approved stock exchange) and the asset is acquired at market value 
• the asset is business real property and acquired at market value
• the asset is an in-house asset, but the level of your super fund’s in-house assets does not exceed the threshold for SMSFs of a maximum 5% of total fund assets, or is an asset specifically excluded from being an in-house asset.

A related party of a fund covers all members of your fund and associates, and all standard employer-sponsors of your super fund and their associates.

In-house assets

An in-house asset is a loan to, or an investment in a related party of your fund, or an investment in a related trust of your fund. An asset of your fund that is leased to a related party is also an in-house asset. In general, as a trustee you are restricted from lending to, investing in or leasing to a related party of your fund more than 5% of your fund’s total assets.

There are some exceptions, including for business real property that is subject to a lease between your super fund and a related party of your fund. There is a limited exemption for certain investments in related non-geared trusts or companies.

Investments need to be made and maintained at arm’s-length

Any time your SMSF makes an investment, it needs to be made and maintained on a strict commercial basis. This is referred to as an investment at arm’s-length. The purchase and sale price of fund assets should always refl ect a true market value for the asset. Income from assets held by your fund should always refl ect a true market rate of return.

Investing in business real property

You need to ensure the level of investment in business real property still meets the investment strategy of your
fund, including diversifi cation of assets, liquidity and maximisation of member returns in your fund. A fund with 100% investment of assets in business real property could have some problems meeting these requirements. As with other super fund investments there can’t be a charge over an asset (that is a loan or covenant).

For more information about self managed super funds and whether this is the best option for you, speak to a financial planner at Intellichoice on 1300 55 10 45. We can also assist with a SMSF loan to buy property through your super fund.