SMSF STRATEGY GUIDE
The investment restrictions for self managed super funds is one of those areas that has been subject to it's fair share of misunderstanding over the years.
The reality is that the superannuation laws do not prescribe the exact types of assets that a trustee can or cannot invest in. What it does do however, is outline a number of restrictions that apply regardless of the asset the trustee is investing into.
WHAT ARE THEY
Investments must be on an arms length basis
Investments in an SMSF must be transacted and maintained on normal commercial terms, so that purchases and sales of assets are always reflective of their true market value. Income from these assets must also be of a true market rate of return.
No loans to members or relatives
Financial assistance or loans to members of the fund or their relatives are prohibited. This includes loans and things like staying in an investment property rent free. Assets of the fund must also not be used as guarantees for personal loans for either members or their relatives.
In house assets no more than 5%
An in house asset includes a loan to, and investment in, or leases with a
related party of the fund. If an SMSF has these, they must be no more than 5% of the fund value. Business real property subject to a lease between the fund and a related party is the exception, which can be up to 100% of the funds assets. Note that SMSFs can invest in a unit trust or a company, and that investment wont be considered an ‘in-house asset’, if certain conditions are met. These are covered under SIS Regulations 13.22C.
Acquisition of assets from 'related parties'
SMSF trustees must not acquire assets from a ‘related party’. There are exceptions to this rule which include:
- acquiring an 'in-house asset' where the level of ‘in-house assets’ of the SMSF would not exceed more than 5% of the fund’s assets;
- acquiring a listed security, such as shares listed on an approved Stock Exchange;
- acquiring ‘business real property’, that is land and buildings used wholly and exclusively in a business. In this instance, the SMSF may acquire up to 100% of the fund’s total assets in this asset.
This of course give rise to the question - what is a related party ?
A related party includes all SMSF members and their associates, their employer sponsors or employer sponsor’s associates. Associates include relatives, business partners, and any companies or trusts that are under their control.
An SMSF cannot borrow money in a general sense, although there are exceptions, including a limited recourse borrowing arrangement.
Charge over assets
This simply means that no assets of the fund can be used as collateral
for something like a loan, or a margin requirement for a trade. The
exceptions to this include futures or options contracts where certain
obligations are fulfilled.