Types of Assets Permitted Under Australian Law for SMSFs
Self-managed super funds (SMSFs) offer trustees the ability to invest in a wide range of assets, providing flexibility not typically available in other types of super funds. However, with this flexibility comes the responsibility to ensure all investments comply with Australian superannuation laws. In this part of our series, we explore the various types of assets that SMSFs are permitted to invest in and discuss some of the restrictions and considerations associated with these investments.
Permissible SMSF Investment Options
SMSFs can invest in a variety of asset classes, each with its own set of rules and potential benefits:
Cash and Fixed Interest Products: These are considered safe, low-risk investments and include term deposits, government bonds, and other fixed-interest securities.
Shares and Equities: Trustees can invest in shares listed on recognized domestic and international stock exchanges, providing potential for capital growth and dividend income.
Property: SMSFs can purchase residential and commercial properties. Commercial properties can be particularly attractive if they are leased back to a business related to one of the members (e.g., a business premises).
Managed Funds: Investments in managed funds, including indexed funds and actively managed portfolios, allow SMSFs to diversify across asset classes and geographical regions.
Alternative Investments: This category includes private equity, commodities, and cryptocurrencies. These investments often carry higher risk but may offer higher returns and diversification benefits.
SMSF Restrictions and Limits
While SMSFs enjoy broad investment latitude, there are important restrictions designed to protect the retirement savings and ensure compliance:
Sole Purpose Test: All investments must be made to solely provide retirement benefits to members. This prohibits the fund from lending to or investing in ways that benefit members or related parties prior to retirement.
In-House Asset Rules: An SMSF's in-house assets, which include loans to, investments in, or leases with related parties, cannot exceed 5% of the fund's total assets.
Arm's Length Transactions: All transactions must be conducted on a commercial arm's length basis to ensure no party is unfairly advantaged. The terms should be the same as if the parties were unrelated.
Considerations for SMSF Investment Decisions
When considering adding a particular asset to an SMSF's portfolio, trustees should consider:
Liquidity: SMSFs need to maintain enough liquidity to cover costs and liabilities, including member benefits as they become payable. Investments in illiquid assets like real estate or unlisted shares must be balanced with more liquid assets.
Diversification: Diversification reduces risk by spreading investments across different asset types and markets. SMSFs overly concentrated in one asset or market may face higher volatility and potential losses.
Risk Profile: Each investment should match the risk tolerance and retirement timeline of the members. As members age, the investment strategy may need to shift to more conservative assets.
SMSF Case Studies: Typical Investment Portfolios
Balanced Portfolio: A mix of equities (both Australian and international), fixed interest products, a commercial property leased to a related business, and a small allocation to cash and term deposits.
Growth-Oriented Portfolio: Higher allocation to international equities and alternative investments like private equity, with lesser emphasis on fixed interest and cash, suitable for members with a longer investment horizon.
Conclusion
Investing through an SMSF offers a unique opportunity to tailor a retirement portfolio to specific needs and preferences. However, it requires careful planning to ensure all investments comply with superannuation laws and align with the fund's overall strategy. In the next and final part of our series, we will discuss the importance of using a financial planner to help manage an SMSF and maximize its benefits for retirement planning.
DISCLAIMER
Any advice contained in this blog post is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Before making any decision, you should consider the appropriateness of the advice with regard to those matters. Ask us for more details.