key smsf rules

Investment Rules for Self-Managed Superannuation Funds (SMSFs)

Running a Self-Managed Superannuation Fund (SMSF) comes with significant responsibilities, particularly regarding investment. Australian law dictates strict rules to ensure your retirement savings are managed prudently and in your best interests. Failing to comply can lead to hefty penalties and even disqualification of the fund.

The Sole Purpose Test

The paramount rule is the “sole purpose test.” This mandates that all investment decisions must be solely for providing retirement benefits to the fund’s members or their dependants in the event of death. This means you can’t use SMSF assets for personal gain or provide financial assistance to related parties. Examples of breaching this include using fund assets to purchase a holiday home for personal use or providing a loan to a family member.

Investment Strategy

Every SMSF must have a documented investment strategy. This strategy must be tailored to the specific circumstances of the fund’s members, considering their age, risk tolerance, financial situation, and retirement goals. The strategy should outline the types of investments the fund will hold, the desired level of diversification, and how the fund will manage risk. This document is not a static one; it must be reviewed and updated regularly, especially when member circumstances change.

Diversification

While not explicitly mandated as a specific percentage, diversification is a crucial element embedded in the requirement for a prudent investment strategy. Concentrating investments in a single asset or industry increases the risk of significant losses. The investment strategy should demonstrate how the fund will diversify its portfolio to mitigate risk. Examples of diversification include spreading investments across different asset classes (shares, property, bonds, cash) and different geographic locations.

Arm’s Length Transactions

All transactions between the SMSF and related parties (members, their relatives, or associated businesses) must be conducted on an “arm’s length” basis. This means transactions must be at market value and reflect terms that would be agreed upon by unrelated parties. For example, if the SMSF rents a commercial property to a business owned by a member, the rent must be at the prevailing market rate.

Restrictions on Borrowing

Borrowing is generally prohibited, but there are limited exceptions, primarily for acquiring a single asset, usually real property, under a Limited Recourse Borrowing Arrangement (LRBA). These arrangements are complex and require strict adherence to regulations. Key requirements include the loan having limited recourse to the SMSF assets beyond the specific asset acquired and the asset being held in a separate trust until the loan is repaid.

Valuation of Assets

The fund’s assets must be valued accurately and regularly, typically at market value. This is particularly important for illiquid assets like real estate. Independent valuations may be required to demonstrate compliance with regulations, especially when dealing with related parties.

Record Keeping

Comprehensive and accurate records must be kept of all investment decisions and transactions. This includes documenting the rationale behind investment choices, valuations, and any due diligence conducted. These records are essential for demonstrating compliance during an audit by the Australian Taxation Office (ATO).

It is highly recommended to seek professional advice from a financial advisor or accountant specializing in SMSFs to ensure your fund is compliant with all relevant regulations. These rules are complex and subject to change, so staying informed is crucial for the successful management of your retirement savings.

1025×403 key smsf rules from www.optimisedaccounting.com.au