Managing Your SMSF Investments
One of the key responsibilities of trustees or members of a Self-Managed Super Fund is managing its SMSF investments. There are also duties and responsibilities when making investments. These are all designed to protect and increase your benefits once you retire.
The Sole Purpose Test
SMSF investments should also meet the sole purpose test. The sole purpose test means that members or trustees should not obtain any financial benefit for their investment decisions aside from providing retirement benefits for themselves which they can only get when they retire and death benefits for their beneficiaries when they die. Like when investing in collectibles like art or wine, members should not be granted access to these assets, otherwise, they will be violating the sole purpose test. Most common breaches of the sole purpose test include making SMSF investments that offer pre-retirement benefits for members. Others include providing financial help or pre-retirement benefits to someone which is detrimental to the fund. Violating the sole purpose test can lead to serious civil and criminal penalties.
The Investment Strategy
There is a need to prepare and implement a strategy for SMSF investments. There is also a need to review it regularly. The strategy should reflect the circumstances and purpose of the fund. Consider:
- Investing to maximise member returns,
- Diversify investments and benefits through shares, fixed deposit, and property in a long-term investment strategy.
- The fund’s ability to pay benefits as members retire,
- Pay other costs incurred by the fund,
- Decide if it is best to have insurance cover for one or more members.
Strategies on SMSF investments should establish investment objectives and detail the investment methods to adopt these objectives. Strategies must be reviewed regularly or when there is a change to the fund, like if a new member joins. Make sure that all investment decisions are made according to the investment strategy of your fund. If you have doubts, it is best to seek help from a qualified investment professional or an SMSF auditor.
Restrictions in SMSF investments exist to protect fund members by making sure that the fund assets are not exposed to undue risks. This may include failure of the business. Investment rules are one of the most important requirements of super law. Failure to comply with rules can cause the fund to lose its compliant status and trustees becoming: disqualified, removed, prosecuted, fined and imprisoned.
Securing The Fund’s Assets
Ensuring that the ownership of the fund’s investments are secure is also very important. They should be held in a legally organised ownership arrangement. Assets should be in the: names of all individual trustees, the name of the company as trustee for your fund for corporate trustees.
However, in some states, laws prevent trustees from holding assets using the fund’s name. For such, you should execute a caveat, declaration or instrument of trust for the asset.
Valuation of Assets
Laws relevant to SMSF requires that the fund’s assets must be valued at market value. These should be used when preparing the fund’s accounts, annual return, and statements.
Loans or financial help to relatives or other members.
As a trustee, you are not allowed to lend money or provide direct or indirect financial help to your fund member or their relatives by using the fund’s assets. This may include guaranteeing a personal loan for a member. Member’s relative includes grandparents, parents, sister, brother, uncle, aunt, niece, nephew, lineal descendant or adopted child of the member or their spouse.
With SMSF you can only borrow money in limited circumstances. You can borrow money for:
- A maximum of 90 days to meet benefit payments for your members or to meet and outstanding surcharge liability.
- Borrowed money should not go beyond 10% of the fund’s total assets. As for borrowing money, trustees can only borrow for settling security transactions if the borrowing would be needed.
- Borrowing with the use of instalment warrants or limited alternative borrowing arrangements should meet certain conditions.
Related Party Acquisition of Assets
You cannot acquire assets for your fund from a related party of the fund. But there are limitations to this rule if the asset is:
- A listed security (like units, shares, and bonds listed on an approved stock exchange)
- Acquired at market value,
- Business real property acquired at market value,
- And in-house asset, which should not exceed a maximum of 5% of the total fund assets.
Related parties include all members of the fund and associates and all standard employer-sponsor of the fund and their associates.
An associate of an SMSF includes:
- Every other member of the fund,
- Relatives of each member,
- Business partners of each member,
- Spouse or child of business partners, any company member that controls or influences and any trust member.
Associates of standard employer-sponsor include:
- Business partners and companies or trusts the employer controls,
- Companies and trusts that control the employer.
An employer-sponsor is one that contributes to the SMSF for the benefit of a member as agreed through an arrangement between the trustee of the fund and the employer.
Business real property includes buildings and lands used wholly and exclusively for business. The main use of the property cannot be for domestic or private use.
- A loan to,
- An investment in a related party of your fund,
- An investment in a related trust of the fund,
- An asset of a fund leased to a related party.
Trustees are controlled from lending to, leasing to or SMSF investments in related parties should not exceed than 5% of the total assets of the fund. The exceptions are:
- Business real property is subject to the lease between a related party of the fund and the fund,
- SMSF investments in related to companies or non-geared trusts.
Loans to related persons or parties are considered in-house assets. Lending money or giving financial help to a member, or his or her relatives, however, is prohibited according to super laws.
Investments should be at arm’s length.
The buying and sale prices of the assets must always be their true market value. Income gained from these assets held must also reflect their true market rate of return.
Investing In Real Property.
SMSF investments in real property should meet the investment strategy of the fund. This includes the diversification of assets, maximising member returns, and liquidity in your fund. There cannot be a loan over an asset.
Kingston Knight Audit are the Auditor Melbourne experts to contact when dealing with your trust account audit, SMSF Audit, financial statement audit, and internal audit requirements. Contact us today, Kingston & Knight Audit offers a free telephone consultation to establish how we can best help you achieve the assurance and compliance you require.