Understanding Investments

General Rules

Superannuation law does not state exactly what investments can be purchased. It does however restrict some investment practices of superannuation funds.

The investment restrictions aim to protect fund members by ensuring fund assets are not overly exposed to undue risk (for example the possible risk of an associated business failing). They also aim to ensure that funds make investment decisions with the primary purpose of generating retirement benefits for members rather than providing current day support.

The trustees are prohibited from acquiring assets for the fund from a ‘related party’. A related party of a fund is a member of the fund and their associates and an employer sponsor of the fund and their associates. An associate includes a relative, business partner and any company or trust that the member or an employer sponsor control.
Exceptions to the prohibition are when:

  • The acquisition of the asset would not result in the‘in-house assets’ of the fund exceeding more than 5% of the fund’s assets;
  • The asset is a listed security (e.g. shares, units or bonds listed on an approved Stock Exchange);
  • The asset is ‘business real property’. Business real property is land and buildings used wholly and exclusively in a business. Trustees are permitted to invest up to 100% of the fund’s total assets in business real property.

Investment rules are one of the most important requirements of the SIS Act and failure to comply with the rules could result in trustees being fined and/or the fund losing its compliance status.

Address for Investment Notices

One of the most challenging tasks for any SMSF Trustee is to keep track of all the documentation, particularly the investment documentation. This information is essential for completing end of year accounting and audit tasks and can often be the cause of delays which result in fines for the Trustee.

Supercorp strongly recommend that Trustees using the YourSMSF Annual service should ensure they keep all of their records secure throughout the year. This information will be needed at the end of the year (or quarterly if BAS or IAS statements are required) and looking for missing information can be a time consuming and costly task.

Capital Gains and Accrued Capital Gains

SMSF Assets, not used to fund a current pension stream, when sold are subject to Capital Gains Tax (‘CGT’). This is automatically calculated and included in the Tax Return and the End of Year Accounts. Additionally, Supercorp will normally also calculate the Accrued CGT (‘ACGT’). ACGT is important because it is the amount of CGT that would have to be paid if all the current assets were sold at the then market price. This provides Trustees and Members with a much more accurate understanding of what the real value of their current superannuation account is.

Investment Strategy

Trustees for all superannuation funds, including SMSFs, are required to prepare and implement an investment strategy. The strategy must reflect the needs and situation specific to the fund and consider:

  • Investing in such a way as to maximise member returns, having regard to the risk associated with holding the investment;
  • Appropriate diversification and the benefits of investing across a number of asset classes (e.g. shares, property, fixed interest) in a long term investment strategy; and
  • The ability of the fund to pay benefits as members reach retirement and other costs incurred by the superannuation fund.

An appropriate investment strategy will set out the investment objectives of the fund and detail the investment methods the Fund will adopt to achieve these objectives.

Trustees must make sure all investment decisions are made in accordance with their documented investment strategy and should seek investment advice in writing or appoint an investment manager if in any doubt.

Following the written strategy is particularly important given the penalties which can be imposed on a fund without a prudent investment strategy or one that has not been reviewed regularly. If a fund trades outside its investment strategy for more than 90 days it may be considered in breach of the compliance requirements. The fund may invest into any investment within the bounds of the investment strategy that is permitted by legislation, and subject to the approval of the Trustees.

Minimum Cash Requirement

To ensure that the Fund can pay its expenses as and when they fall due, Trustees must ensure that any strategy allows for enough cash to cover all expenses such as fees, pensions, insurance premiums etc.