Investment Rules

Getting to know the investment rules

The general rule when it comes to investments is that trustees have a wide selection of choices, provided they are of the opinion the investment decision is made in the best interest of the members’ retirement objectives. This general rule is subject to specific rules prohibiting investments made with related parties or acquiring assets from related parties.

Trustees would be well advised to make conservative investment decisions by adhering to traditional asset classes such as shares, cash, term deposits, government bonds, debentures, indexed funds or investment property. Exotic investments in non traditional asset classes should be avoided or scrutinized carefully. Assets that provide lifestyle advantages – such as artworks, jewellery or holiday houses are more contentious. Assets or investment strategies made to test the rules against borrowing, loans to or investments with related persons, should be avoided.

General investment rules

As a general guide, all self-managed super funds must:

Draft an investment strategy and retain for convenient retrieval;
Enter into transactions that are on an arm’s length basis;
Not borrow. Unless a limited recourse borrowing arrangement is entered into;
Not acquire assets from related parties or members unless they are listed shares and other securities, bank deposits, cash, life insurance policies or business real property;
Not provide financial assistance to member or related parties, such as lending money; &
Not invest in in-house assets except in limited circumstances. 

What can self managed super funds invest in?

Some of the traditional asset classes trustees can consider include:

  • Blue chip public company shares listed on the ASX;
  • Interest bearing investments such as term deposits and cash;
  • Residential investment property; &
  • Commercial properties.

The majority of investments are held in Australian shares and interest bearing deposits for liquidity. A smaller proportion is held in real estate due to the higher entry price and issues with liquidity. However, this has changed over the years as SMSF are permitted to borrow.

Exceptions to the basic investment rule

The basic rules of investments within self managed super funds,  state that trustees may invest in any asset class they believe is in the best interest of the members of the fund. The sole purpose of such investments made should be in the long term financial interest of maximizing the members’ retirement benefits. The exceptions to the basic rule include:

  • Lending to members;
  • Acquisition of assets from members;
  • Borrowings;
  • Non-arm’s length transactions;
  • In-house assets; &
  • Sole purpose test.

The majority of these rules are covered elsewhere on our website. Trustees are advised to seek further advice prior to making any significant investment decisions, such as one off large investments.

 

 

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