Self managed super funds (SMSFs) must be established for the sole purpose of providing benefits to the fund’s members on retirement. Or, if the member dies before retirement, a benefit to that member’s dependants. This is known as the Sole Purpose Test.
SMSF investment strategy
SMSF trustees must prepare and implement an investment strategy for their fund, and regularly review that strategy. This helps trustees to make the best possible investment decisions for their SMSF.
The investment strategy must reflect the purpose and circumstances of the SMSF and consider:
- investing to provide sufficient member returns, taking into account investment risk
- appropriate diversification and the benefits of investing across asset classes (eg Australian and international shares, direct property and fixed interest) in a long-term investment strategy
- the SMSF’s ability to pay benefits as members retire and pay other costs incurred by the fund, and
- the age, income, employment and retirement needs of SMSF members.
Trustees must make all investment decisions according to the SMSF’s investment strategy.
SMSF investment objectives
When selecting investments for your SMSF, you need to ensure that the investment meets the investment objectives of your SMSF.
The overall investment objective of your SMSF must be to provide benefits to members of your fund on retirement, or to members’ dependants in the event of death before retirement.
If the SMSF invests in an asset that doesn’t meet this objective, the fund may become non-complying, or other penalties may apply.
The arm’s length rule
SMSF trustees must ensure that all investments are purchased and managed on an arm’s length basis. This means that:
- the purchase and sale price of SMSF assets should reflect true market value, and
- income from SMSF assets should reflect a true market rate of return.
Generally, the test as to whether a particular transaction is at “arm’s length” is whether a prudent person acting in their own commercial interests would make the transaction. For example, if an SMSF invests in an apartment, the apartment must always be rented out at commercial rates relevant to the location and type of apartment.
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