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Once you’ve established a particular investment is allowed under a fund’s investment strategy you can go ahead with the transaction. Generally, a fund will use a range of services providers such as stock brokers, banks and property managers to complete the investment. Investment transactions should be managed through an SMSF bank account (cash account).
When an SMSF is set up, a cash account should be set up in the fund's name so that it can accept contributions and rollovers of superannuation benefits. This account should be kept separate from the fund members' personal bank accounts.
Aside from being the source account for the fund’s investments and superannuation, the account will also be where money is drawn from for the costs of running the fund and for draw downs of any pension payments.
While the types of investments are many and varied there are some things to keep in mind.
Keeping Assets Separate
The assets of the superannuation fund must be kept separate from the trustee’s personal investments and the assets of employers who may contribute to the fund. The fund should have a separate bank account and pay the fund expenses only from that bank account – not from the trustees or member’s personal bank accounts. The assets of the fund are to be held in the names of all the individual trustees or the corporate trustee as appropriate. Where this is not possible supporting documentation that demonstrates the asset belongs to the fund, such as declarations of trust or trustee minutes should be maintained.
Any assets or money belonging to the fund must not be used for personal or business purposes unless it is specifically allowed by the superannuation law, for example, it is possible to lease commercial property owned by the fund to related parties. The money in the fund is never to be used as a source of cheap finance and cannot be used for emergencies. The fund's investments are maintained for the sole purpose of providing retirement benefits to members, or their dependents on their death. Superannuation cannot be used for a member to gain a current day benefit.
No Lending to Members or Relatives
The fund trustees are not permitted to lend money or provide any direct or indirect financial assistance to members or their relatives. These rules ensure investments are made only for the purpose of providing benefits for retirement or on a members death. A breach of the lending rules would include direct loans or use of the fund’s assets as a guarantee for security of a personal loan. Relatives include the member, their parents, grandparents, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the individual or of his/her spouse, or a spouse of the member or any of those people. A spouse includes legally married spouse, de facto or anyone who lives with the person on a genuine domestic basis as a couple.
No Borrowing except for permitted purposes
An SMSF is prohibited from borrowing except for some limited circumstances. The purpose of this rule is to ensure there is enough money to provide benefits to members when required under the superannuation law. It also reduces the risks of the trustees losing the member’s benefits.
Borrowing for investment purposes can only be done through the use of a limited recourse borrowing arrangement. This means that the loan is only secured against a specific asset and there is no recourse against any of the other assets in the SMSF.
SMSFs acquiring assets from a related party
As a general rule, a trustee of an SMSF is prohibited from acquiring an asset from a related party of the fund, however, there are some very limited exceptions. Related parties include members and their relatives as defined above and any company or trust they control or significantly influence, either individually or as a group.
The reason an SMSF is prohibited from acquiring assets from a related party prevents members contributing personal assets which they could be more likely to use for private reasons. Also, it could lead to personal assets being sold to the fund at inflated prices which could have the effect of allowing money to be withdrawn from the fund earlier than the time permitted by the superannuation law.
The limited exceptions allow an SMSF to acquire certain assets from a related party. These include:
Listed securities, such as shares, units in unit trusts or bonds and debentures that are listed on an approved stock exchange
Business real property that has been acquired at market value
In-house assets where the value of the fund’s in-house assets after the acquisition do not exceed 5% of the total value of the fund’s assets at market value
Be careful with ‘in-house assets’
It is possible for an SMSF to invest in a related trust or company, make a loan to or lease an asset to certain related parties. These assets are referred to as ‘in-house assets’ and there is a limit equal to 5% of the fund’s assets at market value that can be used for in-house assets.
There are some exceptions to the restrictions placed by the in-house asset rules. For example, a commercial property owned by an SMSF can be leased to a related party on an arm’s length basis.
Artworks and collectables
It is possible for an SMSF to invest in collectables, artworks and personal-use assets, however, they must meet the strict rules for their acquisition, storage, insurance and use. These rules help to ensure that those associated with the SMSF do not obtain a current-day benefit and the artwork or collectable is there to provide superannuation benefits for members. The rules apply to:
artwork (painting, sculpture, drawing, engraving or photograph; a reproduction of such a thing; or property of a similar description or use)
coins, medallions or bank notes
postage stamps or first-day covers
rare folios, manuscripts or books
wine or spirits
memberships of sporting or social clubs.
There are restrictions on where the collectables and personal-use assets can be stored and who can access them. The restrictions do not permit the artwork, collectable, or personal use asset to be:
leased to, or be part of a lease arrangement with, a related party such as a fund member, relative of a member or a related company, trust, or partnership
used by a related party
stored or displayed in a private residence of a related party.
The SMSF must make a written record of the reason for the decision on the storage of the investment. The documents are required to be kept for at least 10 years after the decision is made by the fund trustees. This ensures that the trustee of the SMSF has considered the appropriate storage for maintaining an investment that produces retirement income or capital gains rather than one that provides current-day enjoyment.
The investments in artworks and collectables listed above, with the exception of memberships of sporting and social clubs, must be insured in the name of the SMSF within seven days of acquiring the investment. Any collectable, artwork, or personal-use asset which is sold or transferred to a related party must be sold at market price, which is determined by a qualified independent valuer. Trustees may be penalised if they do not comply strictly with the rules.