The Australian Tax Office (ATO) as regulator of SMSFs, is clear about the investing part of running an SMSF –
“You need to manage your fund’s investments in the best interests of fund members and in accordance with the law. The self-managed super fund’s (SMSF)’s investments must be separate from the personal and business affairs of fund members, including your own.” (From Here)
In summary from that page, you need to consider the following –
- Your Investment Strategy
- Sole Purpose Test
- Ownership and Asset Protection
- Member Insurance
- Restrictions on Investments – especially considering Related Party Investing**
- Carrying on a Business in SMSF
- Tax on Income
**Restrictions On Investments
All investments must be made on a commercial ‘arm’s length’ basis. You can’t buy assets from, or lend money to, fund members (or other related parties) unless an exception exists. Generally, your fund can’t borrow money except under strict rules.
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.
In Summary restrictions need to take into account – (click to get more info, any of the following) –
- Related parties and relatives *
- Loans or financial help
- Acquiring assets from related parties
- In-house assets
- Business real property
- Collectables and personal-use assets
*Related Parties and Relatives
The ATO says
A number of investment restrictions apply to transactions involving ‘related parties’ of your fund and ‘relatives of members’. This is because no-one associated with your fund should get a present-day benefit from its investments. Your fund needs to be maintained for the sole purpose of providing death or retirement benefits to your members or the members’ dependents.
A ‘related party‘ of your fund includes –
- All members of your fund
- Associates of fund members, which includes:
- 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 or their associates) controls or influences and any trust the member (or the members or their associates) controls
- Standard employer–sponsors, which are employers who contribute to your super fund for the benefit of a member, under an arrangement between the employer and a trustee of your fund
- Associates of standard employer–sponsors, which includes:
- Business partners and companies or trusts the employer controls (either alone or with their other associates)
- Companies and trusts that control the employer.
A relative of a member means any of the following:
- A parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the member or their spouse
- A spouse of any individual specified above.
Note there is a distinction that can be drawn between an ‘in-house asset’ and a ‘related party investment’.
An ‘in-house asset’ is an asset of the fund that is a loan to, an investment in or a lease with a related party of the SMSF.
A ‘related party investment’ is also an asset of the fund that is a loan to, an investment in or a lease with a related party of the SMSF that meets one of the exceptions of the ‘in-house asset’ rules.
They appear similar, but one is in fact a subset of the other and the distinction is important because a fund is not permitted to invest more than 5% of its capital in an ‘in-house asset’, whereas no such cap applies to a ‘related party investment’.
So, when is a ‘related party investment’ not an ‘in-house asset’? That is, what are the exceptions to the ‘in-house asset’ rules?
Some of the exceptions to the ‘in-house asset’ rules include (ie these are allowed):
- A life policy issued by a life insurance company, but not a life policy acquired from a member of the SMSF or a relative of a member;
- An investment in a pooled superannuation trust made on an ‘arm’s length’ basis;
- Business real property subject to a lease, or to a lease arrangement, between the trustee of the fund and a related party of the fund, if the property is business real property of the fund throughout the term of the lease or lease arrangement;
- An investment in a widely held unit trust;
- Investment in a non-geared related unit trust or company (see below for restrictions)
- A unit trust in which the unitholders have fixed entitlements to all of the income and capital of the trust and fewer than 20 entities between them do not have fixed entitlements to 75% or more of the income or capital of the trust;
- Property owned by the fund and a related party as tenants in common, other than property subject to a lease or lease arrangement between the trustee of the fund and a related party.
Also, an SMSF is able to invest in a unit trust or a company without that investment being considered an in-house asset if certain conditions are met. These include, but are not limited to, the unit trust or company not acquiring an asset from a related party of the fund other than business real property, do not directly or indirectly lease assets to related parties other than business real property and do not conduct a business.
(Also see The three Rs: Responsibility, Related party transactions and Rules Stuart Forsyth, Assistant Deputy Commissioner, Compliance, Strategy, Risk and Delivery, Superannuation)
Interested to know what self-managed super (SMSF) is all about, and if it is for you?
See the slides SMSF Roadmap Overview
If you want experts who have years of helping others, without the hype – then call for a FREE strategy session today and see how our Super-Connector Service assists you to find the right expert to answer your question – it’s FREE also!
No obligation. 0407 361 596, Paul
Also get your FREE Expert Guide – Self-Managed Super and You – top right hand side above.