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SMSF - Investment Strategy
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SMSF Investment Strategy
Investment Strategy
Your investment strategy provides you and the other trustees with a framework for making investment decisions to increase members’ benefits for their retirement. It should be in writing so you can show your investment decisions comply with it and the super laws and it must be regularly reviewed by the trustees. When preparing your investment strategy, you need to consider:
- # diversification (investing in a range of assets and asset classes)
- # the risk and likely return from investments, to maximise member returns
- # the liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses)
- # the fund’s ability to pay benefits (when members retire) and other costs it incurs
- # the members’ needs and circumstances (for example, their age and retirement needs)
- # whether the trustees of the fund should hold insurance cover for one or more members of the fund.
The trustee must review the investment strategies of the SMSF on a regular basis and may amend those strategies at any time. If an investment strategy is amended, the trustee must provide written notice of the amendments to all members.
Restrictions on investments
While the super laws don't tell you what you can and can't invest in, they do set out certain investment restrictions you need to comply with. 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 ‘arm’s length investment’. The purchase and sale price of fund assets should always reflect a true market value for the asset, and the income from assets held by your fund should always reflect a true market rate of return.Unless an exception applies, trustees cannot:
- # lend the fund’s money or provide financial assistance to members and their relatives
- # acquire assets from related parties of the fund, including
- # fund members (and their relatives) or their associates
- # the fund’s standard employer-sponsors or their associates
- # borrow money on the fund’s behalf (certain instalment warrants or limited recourse borrowing arrangements are allowed)
- # lend to, invest in or lease to a related party of the fund (including related trusts) more than 5% of the fund’s total assets (these are called ‘in-house assets’).
A failure to comply with the above restrictions can result in penalties and fines being imposed on the trustee of the SMSF. Accordingly, the trustee of the SMSF should obtain professional advice if there is any uncertainty over whether an investment complies with the applicable superannuation laws.
Sole Purpose Test
Your SMSF needs to meet the sole purpose test to be eligible for the tax concessions normally available to super funds. This means your fund needs to be maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement.If you or any party directly or indirectly obtain a financial benefit when making investment decisions and arrangements (other than increasing the return to your fund), it’s likely your fund will not meet the sole purpose test. When investing in collectables such as art or wine, you need to make sure that SMSF members don’t have use of, or access to, the assets of the SMSF.
The most common breaches of the sole purpose test are:
- # investments that offer a pre-retirement benefit to a member or associate
- # providing financial help or a pre-retirement benefit to someone, to the financial detriment of your fund.
If you need a more strategic approach to SMSF advisory services, just consult the dedicated team of our professionals.
So, feel free to contact us.