One of your key areas of responsibility is to manage your fund’s investments. You have certain duties and responsibilities when making investment decisions. They are designed to protect and increase your members’ benefits for retirement.
YOUR INVESTMENT STRATEGY
You need to prepare and implement an investment strategy for your fund, and review it regularly. The strategy needs to reflect the purpose and circumstances of your fund and consider the following:
- 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 fund to pay benefits as members retire and pay other costs incurred by your 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’ll adopt to achieve these objectives.
You need to make sure all investment decisions are made according to the investment strategy of your fund. If in any doubt, you should seek investment advice or appoint an investment manager in writing.
Super laws place restrictions on the types of entities your 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, like a business failing.
The investment rules are one of the most important requirements of the super laws. Failure to comply with the rules can result in your fund losing its complying status and you as a trustee of the fund being either:
- Prosecuted, which may result in you being fined or imprisoned.
SECURING THE ASSETS OF YOUR FUND
You need to ensure that your fund’s ownership of its investments is secure. Your fund’s assets should be held in a legally recognised ownership arrangement. The Australian Taxation Office prefers the assets to be in either of the following:
- The names of all of the individual trustees as trustees for your fund
- The name of the company as trustee for your fund in the case of a corporate trustee.
In certain states, legislation may prevent you from holding assets using your fund’s name at all. In this circumstance, a caveat, instrument or declaration of trust needs to be executed for the asset.
LOANS OR FINANCIAL HELP TO MEMBERS OR A MEMBERS RELATIVE
You can’t lend money or provide direct or indirect financial help (including the provision of credit) from your fund, to a member, or a member’s relative. For example, using your 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.
From 1 July 2008, changes were made to the definition of spouse to include those in same-sex relationships.
You can only borrow money in very limited circumstances. These 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 the 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 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 fund 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 property value
- The asset is an in-house asset, but the level of your fund’s in-house assets does not exceed the threshold for SMSFs of a maximum of 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 or your fund and associates, and all standard employer-sponsors of your fund and their associates.
An associate of a particular member of an SMSF includes the following:
- Every other member of your fund
- The relatives of each member
- The business partners of each member
- Any spouse or child of those business partners, any company a member (or the members and/or their associates) controls or influences and any trust the member (of the members and/or their associates) controls.
From 1 July 2008, changes were made to the definition of spouse to include same-sex relationships.
Associates of standard employer-sponsors include business partners and companies or trusts the employer controls (either alone or with their other associates), or companies and trusts that control the employer.
A standard employer-sponsor is an employer who contributes to a super fund for the benefit of the member, under an arrangement between the employer and the trustee of a fund.
Business real property generally relates to land and buildings used wholly and exclusively in a business.
If business real property is used in a primary production business, such as a farm, it can still meet the test of being used wholly and exclusively in a business, if an area of land, no more than two hectares, contains a dwelling that is used for private or domestic purposes.
However, the main use of the whole property can’t be used for domestic or private purposes.
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 a 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 fund and a related party of your fund. There is a limited exemption for certain investments in related non-geared trusts or companies.
Special investment rules
Special investments riles may apply to investments made by funds before 11 August 1999. However, the transition period for in-house asset rules applying to such investments are due to expire on 30 June 2009.
If your fund was established before this date and has assets acquired under the riles applying for then, contact our office or the Australian Taxation Office.
Investments need to be made and maintained at arm’s length
Any time your Self Managed Super Fund 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 reflect a true market value for the
Income from assets held by your fund should always reflect a true market rate of return.
Investment 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 diversification 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 assets (that is a loan or covenant).
SAVE ONLY FOR YOUR RETIREMENT
Your Self Managed Super Fund needs to meet the sole purpose test. 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. As a trustee, you need to maintain your Self Managed Super Fund so that it complies with the sole purpose test at all times while your Self Managed Super Fund exists, including when investing fund assets and paying benefits upon retirement of members.
Your fund needs to comply with the sole purpose test to be eligible for the tax concessions available to a complying super fund.
The sole purpose test is divided into core and ancillary purposes. Your fund needs to be maintained solely for either of the following:
- One or more core purposes
- One or more core purposes and one or more ancillary purposes
Generally, core purposes are the provision of benefits for each member of your fund, on or after the:
- Member’s retirement from gainful employment
- Members reaching the prescribed age
- Member’s death, if the death occurred before they had retired from gainful employment or before they had attained a prescribed age, where the benefits are provided to their dependants or legal representative.
Generally, ancillary purposes are the provision of benefits for members in the following circumstances:
- Termination of a member’s employment with an employer who made contributions to your fund for that member
- Stopping employment due to physical of mental ill health
- Death of a member after retirement, or after reaching the prescribed age where the benefits are paid to their dependants or legal representative
- Other ancillary purposes approved in writing by the regulator
This purpose lets an SMSF provide benefits where there is financial hardship or compassionate grounds, subject to the super laws, the governing rules of your fund and the approval of the Australian Prudential Regulation Authority (APRA).
CONTRAVENING THE SOLE PURPOSE TEST
One of the main ways the Australian Taxation Office work out if an Self Managed Super Fund has contravened the sole purpose test is to look at the character and purpose of your investments. For example, 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 is likely your fund will not meet the sole purpose test.
Working our the purpose for which an Self Managed Super Fund is being maintained requires looking at all of the events and circumstances relating to the Self Managed Super Fund’s maintenance.
When investing in collectibles such as art or wine, you need to take care to make sure that the Self Managed Super Fund members are not granted use of or access to the assets of the Self Managed Super Fund in contravention of the sole purpose test. The most common breaches of the sole purpose test are:
- Investments that offer a pre-retirement benefit to a member of associate
- Providing financial help or a pre-retirement benefit to someone at a a financial detriment to your fund.
PENALTIES FOR CONTRAVENING THE SOLE PURPOSE TEST
Contravening the sole purpose test is very serious and may lead to trustees facing civil and criminal penalties.
It can result in a fine of up to 2000 penalty units and/or five years imprisonment for individual trustees, and may result in your fund losing its complying status. Higher penalties apply to corporate trustees. The value of a penalty unit is currently $110.
CHECK YOU ARE MANAGING YOUR FUND INVESTMENTS
- Make sure the Self Managed Super Fund complies with the sole purpose test at all times while the fund is in existence, including when investing fund assets and paying benefits upon retirement of members.
- Make sure you developed an investment strategy that you regularly review.
- Ensure your investment strategy takes into account the retirement goals of your members.
- Take into consideration the risks involved in certain investments.
- Take into consideration what bills your Self Managed Super Fund has to pay and allow enough cash to meet these expenses.
- Take into consideration when benefits will need to be paid.
- Have a separate bank account for your Self Managed Super Fund and pay the expenses from your fund from that bank account only.
- Make sure that your fund’s ownership of it’s investments is assured. The ATO prefer the assets to be in the names of all the individual trustees as trustees for your fund, or in the case of a corporate trustee, the name of the company as trustee for your fund.
In certain states, legislation may prevent you from holding assets using your fund’s name. In this circumstance, a caveat, instrument or declaration of trust needs to be executed for the asset.
- Make investment decisions that will provide for your retirement.
- Don’t invest without considering your strategy and overall goals for retirement.
- Don’t mix your Self Managed Super Fund money with other money.
- Don’t have the assets of your Self Managed Super Fund in another entity’s name.
- Don’t provide financial assistance to members or relatives of member’s.
- Don’t make investments to help someone else out.
- If your Self Managed Super Fund buys art, generally you can not use it privately.
- Don’t buy wine as an Self Managed Super Fund investment and then drink it.
- Don’t buy jewellery as an Self Managed Super Fund investment and then wear it.
- Don’t use any of the assets of your Self Managed Super Fund for your own personal use or allow members or related parties to use those assets.
Rogerson Kenny Business Accountants Melbourne can assist you with your accounting and auditing requirements. If you would like to appoint Rogerson Kenny Business Accountants as your approved auditor, or would like to discuss this topic further, call us on (03) 9802 2533.