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Fund Investments


All investments must be made in accordance with the investment objectives and strategies the Trustees have adopted.


Your selected investments may include, but are not limited to:

  • The share market and managed trusts
  • The money market
  • Futures, derivatives and warrants
  • Investments and insurance bonds
  • Real estate
  • Overseas and Australian investments



 Fund Investment Strategy


Before you can make any investment, Trustees take account of 4 factors:

  • The Sole Purpose Test
  • The Trustee Covenants
  • The Arms Length Rule
  • The Investment Strategy


Trustees must set investment objectives and strategies that are appropriate for their SMSF. These investment objectives must consider:

  • The purpose of the SMSF
  • The risks involved with holding a particular investment or type of investment
  • Expected growth
  • Liquidity requirements - Will funds be available to pay member benefits, taxation liabilities and expenses?
  • Diversification of investments


Having determined the fund objectives, the Trustees should then formulate a strategy to achieve these objectives. The components of the investment strategy could include:

  • Setting assets classes – shares, master trusts, property, deposits, etc
  • Setting asset allocation; nominating the percentages to be invested in each asset class. This is normally a range of allowable percentages, not a specific nominated percentage. The range for each asset class should be set having regard to the risk inherent in a particular investment type and the benefits of diversification.
  • Liquidity requirements – retaining a certain level of liquidity to pay benefits as they are required, as well as other expenses including taxation liabilities.


With each asset class, the type of return should be considered. Some assets are more likely to pay an income stream, whilst other assets are held for their capital growth. Some investments do not pay any income until maturity; others pay a regular distribution that may contain franking credits.


Each member of the fund has a particular risk profile which in combination should be used to establish to risk profile of the SMSF. This also is an element in determining the appropriate investment strategy for the fund.

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The Alan Skerritt Consultancy

                   Specialists in Superannuation

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We are an independent family owned business that has specialised in Self Managed Superannuation (SMSF) for more than 30 years..

 


Restrictions on Investments


Many investment types are permitted under the Superannuation legislation. However, although an investment may be permitted, there are still restrictions for assets relating to:

  

  • who a fund can acquire an asset from
  • how an asset is used
  • how the fund pays for the asset
  • the rate of return on an asset


Acquisition of Assets from a Related Party


The general rule is that a fund cannot acquire assets from a fund member or a related party. This can be a complex area and it is recommended that you seek advice before entering into any arrangement to acquire assets where it is possible they may be considered to be related parties. Broadly a related party is defined as:

  • Every member of the fund
  • The relatives of each fund member (including their spouses)
  • Any business partners of the member, or the spouse or child of these business partners.


(The full definition of associates is quite complex).


However there are certain exceptions to this prohibition. The following investments can be acquired from a related party:

  • Listed Securities (shares, unit trusts, bonds on an approved stock exchange)
  • Business Real Property acquired at market value
  • The asset is an in-house asset which does not cause the fund to exceed the maximum allowable limit of 5% of the total fund assets.


How an Asset is used


If the fund acquired an asset which is a permitted asset, but makes the wrong use of the asset, they can breach certain regulations.


For example, with a correctly formulated investment strategy, a fund may acquire residential property. However, if the investment property is rented to a family member, it will also become an in-house asset. These assets then become subject to the allowable in-house asset limit of 5%.


How a Fund pays for an asset – Borrowing Restrictions


Again, the general rule is that a fund is not permitted to borrow money. The permitted exceptions are:


Funds are allowed to borrow for a maximum of 7 days to cover the settlement of a security transaction. The amount of borrowing cannot exceed 10% of the funds total assets.


The other exception to borrowing is investing in instalment warrants. Property may be purchased using an instalment borrowing arrangement, but do not proceed with this without seeking advice.


The Rate of Return on an Asset


Any investment needs to be maintained on an arms length basis and the income received should be a market rate of return, paid on a commercial basis.


The purchase and sale price of Superannuation fund assets must reflect true market values


Rental and lease arrangements must be maintained on commercial terms and should reflect a true market return for the asset.

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The Alan Skerritt Consultancy

Windsor Holdings Pty Ltd  (ACN 010 018 041 ABN 12 862 040 559)

(Incorporated in Queensland)  Trustee

 info@skerritt.com.au