When managing the Self-managed superannuation fund (SMSF), trustees are required to ensure that the investments are not breaching the investment restrictions contained in the SIS Act. These restrictions aim to protect member’s benefits.

Allowed investments

SMSF are allowed to invest in:

  • Shares;
  • Bonds;
  • Managed Fund;
  • Direct property or property trust;
  • Art & collectable;
  • Foreign currency, gold and silver;
  • Derivatives.

Borrowings

SMSF can only borrow money in very limited circumstances. The circumstances include:

  • Fund payments of a beneficiary;
  • Cover settlement of securities transactions;
  • Acquire assets under limited recourse arrangement; 
  • Fund a payment of superannuation guarantee charge; 
  • Investment in instalment warrants;

Limited recourse arrangement

From 24 September 2007, SMSF is allowed to borrow money to purchase assets under limited recourse arrangement:

  • the borrowed monies are used to acquire a single asset, or a collection of identical assets of same market value;
  • the borrowed monies are not used to improve an existing asset;
  • the asset is required to be held on a unit trust and the SMSF is a beneficiary of the unit trust;
  • the SMSF has a right to acquire the legal ownership of the asset by making one or more payments after acquiring the initial units;
  • any recourse that the lender has will be limited to the acquired assets, i.e. on default of the loan, the lender cannot demand payments from other assets of the superfund;
  • the acquired asset cannot be used as a security on borrowing;
  • the acquired asset is the only property held by the trust;
  • the acquired asset is not an in-house asset.

Instalment warrants

An instalment warrant is a way to gear the superfund to invest in any permissible asset class, including real estate. An installment warrant is a structured gearing product where an asset is offered on credit. Installment warrants are like buying certain % share of the assets now and pay for the rest later and the borrowers are required to pay interest each year. In practice, the super will acquire the asset, a third party (lender) will contribute the money via instalment warrant arrangement with following terms:

  • The borrowed monies are used to acquire an asset which the fund is not otherwise prohibited from acquiring.
  • The asset acquired is held on trust so that the fund is the beneficial owner.
  • The fund has the right to acquire legal ownership of the asset by making one or more payments after acquiring the beneficial interest.
  • If the super defaults on the loan, the lender’s only recourse is limited to the asset in question but not any other asset in the fund.
  • Upon payment of the final instalment the super is entitled to receive a transfer of the asset.

Acquisition of assets from a related party

Superfund is prohibited from acquiring assets from a related party. Exceptions are:

  • the asset is an in-house asset and the value is less than 5% of the total fund asset
  • the asset is a listed security e.g shares, or business real property, and the asset is acquired at market value

In-house assets

A SMSF is prohibited from lending to or investing in a related party of more than 5% of the total fund assets. An in-house asset can be:

  • A loan to a related party;
  • Investment in a related party;
  • Investment in a related trust.

Certain exceptions are:

  • Superfund leases from the related party the business real property.
  • Certain investments in related non-geared trusts or companies are also exempted.

Investments need to be made at arm’s-length

All investments are required to be undertaken at arm’s length. An external valuer can be used to obtain the market value of the assets.

Investing in business real property

SMSF needs to ensure the level of investment in business real property still meets the investment strategy of  the fund, including diversification of assets, liquidity and maximisation of member returns in the SMSF.

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