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Self Managed Super Fund (SMSF) Article
How to use your super fund's assets

By Tony Negline.

This article may be out of date.

4th May 2005

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One of the distinct advantages of running your own super fund is the greater choice in investments.

A Self Managed Super Fund theoretically can invest in any asset.  As the SMSF members are the trustees, they are the people who ultimately make all investment decisions for their fund.  Compared to all other super investments, SMSF members and trustees have unrivalled influence in how a fund invests its capital.

Most SMSF users find this flexibility important.  A recent study by the research company Investment Trends found that, for members and trustees, more control of investments was one of the main reasons they set up their SMSF.

It is very common for SMSF trustees and members to want to use some or all of their fund’s assets for business purposes or personally.  There are many examples – a fund might own the business premises where the members (or their relatives or close business associates) run a business, a fund might lease business equipment to the members business or a fund might own a holiday home which is sometimes used by members or their relatives.

There are at least three possible motivations – access to capital, finance arrangements which are easier to implement and access to the tax advantages of superannuation.

However before a SMSF trustee rushes out and buys the first item they see, it is important to point out that there are a large range of conditions and restrictions that have to be worked through before an asset is ultimately purchased.

In the first instance it is very important to check what a fund’s trust deed says.  It would be unusual for a trust deed not to contain some powers that permit a trustee to invest the fund’s money in a list of authorised assets but prohibit the dealing in unauthorised investments.  If a trust deed is silent about a particular type of investment, or silent about all investments, then the trustee must have regard to the range of investments authorised by the relevant state or territory legislation.

A super fund’s trustee cannot breach the investment powers conferred on them.  To do so may be a breach of trust and also possibly a violation of specific super law which says that a person involved in the running of a fund must not infringe any governing rule of a particular fund.

Once this hurdle has been cleared, it is necessary to make sure an investment meets the requirements of the sole purpose test (SPT).  The SPT says that a super fund must exist to satisfy principles that are spelt out in the super laws.  The most common purpose for super funds is to provide the members with retirement benefits.

A trustee must also make sure that it is not acquiring an asset from a fund member or any person or entity deemed by the super laws to be related to the fund, such as relatives of fund members or companies and trusts that are controlled by the members or their relatives.

Next the trustees need to decide if a particular asset will be an ‘in-house asset’.  These are assets that are either loans to or investments in related parties of the fund, investments in trusts related to the fund, or fund assets leased to related parties of the fund.

All super fund trustees must make sure that less than 5% of the market value of their fund’s assets are invested in ‘in-house assets’.  A fund must comply with the two tests that apply to this restriction.

Firstly, a trustee cannot buy an asset if it would cause the fund to exceed the five percent in house asset maximum.  Secondly at the end of each financial year a trustee must test to make sure the fund does not exceed the 5% in house asset restriction.  If a fund breaches this second test, they must produce a written action plan (which must be prepared by the end of the following financial year) that details how the trustees proposes to correct the infringement.

There is one very important exemption to this general rule.  If a fund owns business premises that are leased to a fund member’s (or their relative’s) business then those premises are not deemed to be an in house asset.  In this circumstance it is important to make sure that a market-based rent is paid.

In the publication “DIY Super – It’s Your Money … But Not Yet!” the Australian Taxation Office mentioned a number of common breaches of the super investment rules which it suggested trustees should avoid – making investments to help someone else out, buying art and hanging it on your wall, buying wine and then drinking it, buying jewellery and then wearing it, using any of the assets of your fund for your own personal use or allowing members or parties related to the fund to use those assets.

 Checklist:

  1. Check your trust deed or relevant legislation
  2. Is the sole purpose test satisfied
  3. Has the fund acquired an asset from a member or other related person or entity?
  4. Has the fund satisfied the in-house asset test?
  5. Has the trustee dealt with everyone at arm’s length?

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This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.

 
 
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