What Can A Self-Managed Super Fund (SMSF) Invest In?

One of the attractions of having a Self-Managed Super Fund (SMSF) is the ability to invest in a broader range of investments than those typically available in a retail or industry super fund. Self-Managed Super Fund investments can include those from traditional asset classes (cash, fixed interest, property, shares and international investments) as well as residential property, and under certain conditions, other assets such as collectibles. When making investment decisions for an SMSF, keep in mind that any investment must be on a commercial ‘arm's length’ basis.

What is a Self-Managed Super Fund?

As the name suggests, a Self-Managed Super Fund is a fund where the responsibility of managing the fund and making investment decisions rests with the members of the fund, rather than relying on an external trustee or fund manager. In an SMSF, the fund members are also the trustees, which means that members have direct control of the fund's investments, strategy, and compliance with relevant legislation.

An SMSF is a type of trust, and the trust deed establishes the rules of the trust, including who can be a member, powers of the trustees, and how retirement benefits will be paid.

How does an SMSF work?

An SMSF can have no fewer than two, and no more than six individual trustees. All trustees share the responsibility of running the fund and ensuring compliance with superannuation laws.

An SMSF can also have a corporate trustee.

Trustees are responsible for preparing the fund's investment strategy, implementing the strategy, monitoring investment performance, and ensuring the fund meets the ‘sole purpose test’. The sole purpose text requires trustees to maintain the fund for the primary purpose of providing retirement benefits to members of the fund.

What is an SMSF investment strategy

An SMSF investment strategy is a plan for making, holding, and selling investments consistent with the investment objectives and retirement goals of the members. It should set out how your strategy will meet those goals and objectives.

Your SMSF investment strategy should be in writing, and tailored to the specific needs of the fund's members. It should not be generic.

Under the current super laws, your strategy must consider the risks involved with the fund's investments, the level of diversification, how the fund will generate cash to meet the costs of running the fund and the fund's ability to pay retirement benefits to members.

The strategy must not include investment in assets that breach the fund's trust deed or the super laws.

What Self-Managed Super Fund investments can I make

One of the benefits of using an SMSF to invest is the broader range of investments available when compared to a retail or industry super fund.

If provided for in the fund's investment strategy, you may use an SMSF to invest in a range of asset classes and types of investment:

Shares

If your investment strategy permits and you're interested in having your SMSF invest in shares, there are a number of ways to gain exposure:

Listed Shares

Listed shares are those quoted on a stock exchange, like the Australian Securities Exchange (ASX). Buying shares means you benefit from part-ownership of a company, and you may benefit from dividend payments and capital growth. Investing in listed shares means you can access a range of industry sectors and markets.

Exchange Traded Funds (ETFs)

Exchange Traded Funds are a type of investment that is listed on a stock exchange, and commonly replicate the performance of an index, like the ASX 200. ETF investment can be a cost-effective alternative to investing in individual shares directly.

Managed Funds

A managed fund is typically a unit trust, where investors' funds are pooled and invested by professional managers. Because managed funds are typically run by active investment managers, fees may be higher than those associated with passive funds like ETFs, although there is the potential for better investment returns and greater diversification.

Property

An SMSF may make a property investment directly (for example, purchasing a residential property) or indirectly through a property trust.

Listed property trusts are listed on a stock exchange, and typically provide diversification across a number of commercial, industrial or retail properties. Units in unlisted property trusts are bought and sold on a secondary market or from the promoter. Unlisted property trusts commonly provide exposure to a single asset, like a hotel or property development.

Fixed Interest Securities

Self-Managed Super Fund investments can include a range of fixed interest securities, such as government bonds, corporate bonds and term deposits. Investing across a range of fixed interest products can provide diversification between credit ratings and maturities.

Cash

An SMSF can invest in cash. Cash is generally suitable for short-term needs, such as paying for the running costs of a fund. Because cash is a highly-secure investment, it can also be suitable for funds demanding a very high level of security

Collectables

Depending on the terms of the trust deed and investment strategy, it may be possible for an SMSF to invest in collectibles, such as antiques, paintings, rare books or even motor vehicles. Trustees will need to keep in mind all investments must be at arms-length, and intended for the purpose of providing retirement benefits to members.

Generally, collectibles and other specialised investments must not be available for personal use or enjoyment and must be clearly identified as assets of the SMSF.

What are the risks of Self-Managed Super Funds?

Although Self-Managed Super Funds may provide greater flexibility that industry or retail super funds, they also carry specific risks in addition to those faced by public-offer funds.

Market Risks

The performance of your SMSF investments can be affected by a range of factors, and they could fall in value or become worthless. If an individual investment performs poorly, the overall portfolio will be affected, potentially resulting in lower retirement incomes.

Liquidity

Some investment types, including property, unlisted trusts and thinly-traded shares may be difficult to sell within a reasonable timeframe. SMSF trustees should be aware of this, and ensure the fund has sufficient liquidity (generally money in the bank) to meet ongoing fees and costs.

Lack of diversification

While SMSFs have a broader choice of investment options than industry or retail super funds, there is still a need to consider the benefits of diversification. The fund's investment strategy is required to consider how diversified the overall portfolio is, particularly when a single large asset, such as a property, is considered for purchase.

Liability

The trustees of an SMSF, and the directors of the corporate trustee of an SMSF, can be held personally liable for decisions made on behalf of the trust. The ATO is responsible for assessing ongoing compliance, with a range of penalties for breaches, including removal of an SMSF's concessional taxation status.

Ready to invest with your Self-Managed Super Fund?

Running your own SMSF can be a rewarding strategy, but it's important to consider whether you have the time, the skills, and the ability to manage your own retirement savings effectively. Anybody considering establishing an SMSF should consider seeking specialist legal and accounting advice prior to proceeding.


This article contains information of a general nature only, and should not be regarded as advice, either general or personal. Anybody considering investing in SMSFs should seek professional financial and legal advice prior to making investment decisions.

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