Key rules to obey when making investments in your SMSF

Self-managed superannuation funds, otherwise known as SMSFs, can be a great way to take control of your retirement. Being self-managed, you essentially take responsibility for all investments, insurances and management decisions.

While having control over your own super can be appealing, it’s a lot of work and comes with risks, as well as a LOT of rules and regulations you must comply with.

There are restrictions under the super laws with respect to your SMSF investments. And to make it seem even more confusing and complex at times, there are not only quite a lot of rules to follow, but also exceptions to these rules!

There are lots of common investments your SMSF can invest in, including:

• Shares
• Cash
• Listed and unlisted property trusts
• Fixed interest securities
• Managed funds
• Direct property

There are also other investments you may want to invest in via your SMSF, such as:

• Unlisted companies
• Unlisted unit trusts
• Precious metals
• Collectables and art

That is why in this section, we are going to cover off on the most important rule to obey when not only purchasing investments in your SMSF, but running and maintaining your SMSF: the ‘sole purpose test’.

The sole purpose test

The sole purpose test is the most important rule SMSF trustees need to follow, as you need to comply with it at all times your SMSF is in existence. This extends to all activities undertaken by the SMSF during its life cycle, which broadly encompasses not only acquiring investments, but also:

• Accepting contributions
• Administering the Fund
• Holding and using Fund assets
• Paying benefits, including benefits on or after retirement

What is the sole purpose test?

Under this test, your super 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. So every investment your SMSF makes should be made with this intent.

Scenario

Karl, 38, and Charlotte, 30, are members and trustees of their own SMSF. They would love to buy a holiday home on the Sunshine Coast that they can regularly use and could perhaps one day retire to, but don’t have enough personal savings or equity in their own home. A real estate agent friend tells them that he thinks they could buy a property in their SMSF and rent it out as a holiday home, then move into it when they retire. Karl and Charlotte love this idea, and want to buy the property in the SMSF so they can use it as a holiday home each year.

The Issues

If Karl and Charlotte were to acquire the holiday house in their SMSF with the intent to use it as their holiday home, it would be a direct breach of the sole purpose test. They are gaining a current benefit from the use of the asset.

Other key investment rules

The other important rules to remember BEFORE you invest your SMSF money include:

1. Ensure investments are made and maintained on an arm’s length basis. Transactions should not favour either party. The purchase and sale price of fund assets should always reflect true market value, and the income from fund assets should always reflect a true market rate of return;
2. You can’t lend money to fund members or other related parties (however there are some exceptions to the rules around lending to related parties. Note you can’t even lend to Fund members);
3. Ensure the investment has not been acquired from a related party, except where specifically allowed;
4. Your fund can’t borrow money – and that includes going into overdraft. Again, there are some specific exceptions to this rule, some of which are covered off in this eBook.

So when looking to acquire and hold investments in your SMSF, remember these key rules. You are free to choose what type of assets you may invest in, providing those investments:

• Are permitted by your fund’s trust deed
• Are not prohibited by the super laws
• Meet the sole purpose test

Ready for more SMSF investment insights? Click here to discover the next rule for for successful SMSF investments or contact our teams of experts for personalised advice on your superannuation investments today.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.