Managing an SMSF comes with more freedom in investing compared to Retail and Industry Funds. However, there are still investment rules that Trustees must follow. There are regulations which guide what your Fund can and can’t do when it comes to investments in an SMSF. Some of these include lending or providing financial assistance to Members or related parties, acquiring assets from Members or related parties and using your SMSFs investments for personal benefits in the present day. Trustees should strive to understand the rules before they start investing in there SMSF, breaching contribution caps, failing to follow your investment strategy, or incorrectly handling related-party transactions can result in penalties and compliance issues.
The most important rule in an SMSF is the Sole Purpose Test. This means all investment decisions must be made for the sole purpose of providing for your retirement benefit. As such you can’t derive a current day benefit in conducting your SMSF affairs. A good example of this is purchasing a holiday home for you to use over Christmas. Even though it may be a
solid investment, if you receive a benefit from this before retirement age, it will not pass the sole purpose test.
SMSF Rules Explained
SMSF investment rules exist to benefit your superannuation, as they guide Trustees to use their SMSF investments as long term retirement savings instead of short-term personal benefits. Trustees are in direct control of their SMSF’s investment decisions and rules are enforced by the Australian Tax Office (ATO) which prevents misuse and early access to retirement benefits. The ATO has authority to review Funds, enforce penalties and conduct audits. In some instances, the ATO may even disqualify Trustees who fail to meet their responsibilities and obligations. Trustees are legally responsible to comply with the superannuation laws at all times. Trustees must have a documented investment strategy, as this shows what the Trustees plan to invest in their SMSF. If the SMSF has an investment that doesn’t align with the investment strategy it can cause a compliance issue.
The ATO has recently became more lenient compared to past years. As for less serious breaches the ATO may issue a formal warning, direct Trustees to undertake an education course or require a written rectification plan. This shows the ATO’s approach to provide more education to Trustees instead of issuing penalties straight away. It does not mean that the breaches are being ignored, but shows how the ATO is willing to give Trustees the opportunity to correct their mistake and educate them in the process so the same mistakes do not occur.
Although the ATO may be more lenient than previous years, the more serious or repeated the breach, the more likely the ATO will take stronger action.
SMSF Rules You Must Follow
SMSF’s have non-negotiable rules that every Trustee must follow. This includes the Sole purpose test, which requires that your Fund is managed solely for the purpose of providing retirement benefits to the Members in the SMSF. This rule becomes important as is outlines the intent of the decisions made by Trustees, as although an investment decision can be technically allowed through superannuation rules, the rule outlines if that decision provides current day benefits to a Member. Breaching the Sole purpose test can lead to significant penalties and can have the Fund made non-compliant.
Your SMSF must have a documented investment strategy that outlines how the SMSF plans to invest. The investment strategy includes diversification, liquidity, risk and Members’
circumstances. Trustees’ investments must align with the investment strategy, as well as it needs to be reviewed regularly.
What Can SMSF Invest In?
SMSF’s give Trustees more freedom to invest in a range of options. These options include Australian and international shares, cash and term deposits, collectables, precious metals, cryptocurrency, property (residential and commercial) and international property.
Property is a popular investment in SMSF’s, however it must be purchased and held correctly. The property must be held for retirement benefits only. This means it cannot be used by the Members or related parties for personal use, holidays or living in the property. Also, as SMSF’s are unable to get a loan, it must be done through a limited recourse borrowing arrangement. This means that the loan is secured against the property only and the lender has no claim on other SMSF assets. Also the property will be held by a separate trust (custodian trust). Shares are also a common option as it allows for SMSF’s to have a more diversified portfolio across a range of industries.
Whilst the range of investment options is wide, it is important that every investment made in the SMSF aligns with the investment strategy. This means to consider how each asset fits your Fund’s risk tolerance, liquidity needs and overall diversification goals.
What SMSFs Cannot Invest In
Although there are a wide range of options for investments in an SMSF. There are boundaries which limit what Trustees can invest in. One of the restrictions is personal use assets, SMSF’s are restricted in investing in assets that provides a benefit to Members before retirement. Including options like cars, boats or holiday homes that Members use before retirement. As these assets are considered to provide Trustees with present day personal benefits rather than supporting retirement outcomes. Also causing the Trustees to not comply with the Sole purpose test and having serious outcomes to their Fund’s complaince status.
Another restriction is that SMSF’s cannot lend money or provide any financial assistance to Members or related parties. This means that there are no personal loans, and no using Fund’s assets as a strategy to support family members financially. This rule is to prevent Trustees from accessing their superannuation benefits early and using the Fund as a personal financing tool for short term personal gain.
SMSF’s cannot buy assets from Members or related parties. Exceptions exist for purchasing listed securities and commercial property at market value, but all such transactions must be at arm’s length and commercial terms to comply with superannuation laws. Breaching these rules may lead to compliance issues.
Can an SMSF Sell Property to a Member?
Although you can’t purchase a residential property from a related party, there is no prohibition in selling it to yourself.
A great strategy to purchasing a retirement property is to purchase it in your SMSF, claim the interest and property depreciation as a tax expense in the Fund and then transfer it to yourself as a lump sum once a condition of release is met. Trustees must carefully consider tax and compliance implications. The property must be valued appropriately, ideally with an independent valuation to support the market value. Capital gains tax may apply within the Fund if the property has increased in value and proper record keeping in the name of the SMSF are essential to demonstrate compliance in the event of an ATO review.
So the best tax consequence is to start a pension before the property is taken out from an SMSF. This makes that the potential capital gain is taxed at the rate of NIL. After a minute is done confirming the asset is to be taken as a lump sum, do a transfer via a conveyancer. There should be no stamp duty payable as there’s no change in beneficial owner although there will be a transfer fee to change the name on title from the SMSF to your personal name.
Remember if there’s a loan outstanding that this needs to be settled or refinanced when the property is transferred from the SMSF to yourself.
SMSF Investment Strategies
Every SMSF is required to have a documented investment strategy that reflects the circumstances of its Members and the purpose of providing retirement benefits. The strategy should consider risk, return, diversification, liquidity and the ability of the Fund to meet its liabilities. Concentrating all assets in a single property or asset class is not automatically prohibited, but it increases risk and must be carefully documented as being appropriate for the Members’ objectives and risk tolerance.
Liquidity and cash flow planning are also critical. An SMSF must be able to pay its ongoing expenses, such as accounting, audit and insurance premiums. As Members approach retirement and begin drawing pensions, the Fund must also have sufficient liquidity to meet benefit payments. Holding large illiquid assets without adequate cash reserves can create financial strain and compliance risks.
Importantly, an investment strategy is not a one-time document. It should be reviewed regularly and updated when Members’ circumstances change. Auditors and the ATO expect Trustees to demonstrate that they actively monitor and reassess the SMSF investment strategy over time.
Common SMSF Investment Mistakes
One of the most serious mistakes Trustees can make is mixing personal and Fund assets. SMSF assets must be kept entirely separate from personal assets. This includes maintaining separate bank accounts and ensuring assets are registered in the correct Trustee name. Using SMSF assets for personal benefit is a clear breach of the sole purpose test and can attract significant penalties.
Another common issue is over-concentration in a single investment without properly documenting the rationale. While SMSFs often invest heavily in property or a related business asset, Trustees must ensure that this aligns with their documented investment strategy and retirement objectives.
Poor documentation is also a frequent compliance problem. Trustees are responsible for maintaining accurate records, keeping Minutes of decisions, and ensuring the investment strategy remains current. An outdated or generic strategy can raise red flags during an audit.
Penalties for Breaching SMSF Investment Rules
There are consequences to breaching SMSF rules. The ATO has the power to impose administrative penalties on Individual Trustees, and these penalties are payable personally, not from the Fund’s assets. In addition, Trustees may be required to undertake education courses or rectify breaches within a specified timeframe.
More serious breaches can result in the loss of the Fund’s concessional tax treatment. A Complying SMSF generally benefits from a tax rate of 15 percent in accumulation phase. If the Fund becomes Non-Complying, it may face a significantly higher tax rate on its assets, which can dramatically reduce retirement savings.
The ATO may also make the Fund Non-Complying, or disqualify Trustees. The financial and reputational consequences of such action can be substantial. The ATO does not take a big stick approach to penalties or making a Fund non-compliant. As the accountant of your SMSF, there is plenty of help and resources available to ensure you remain on track with compliance obligations.
Is an SMSF Right for You?
An SMSF can be an effective structure for individuals who want greater control over their superannuation investments and are willing to accept the associated responsibilities. It may be suitable for those with larger balances, specific investment goals such as owning business premises through super, or a strong desire to manage their own portfolio.
However, an SMSF is not appropriate for everyone. Trustees must manage compliance obligations, administrative tasks and investment decisions. For individuals who prefer a hands-off approach, have smaller balances, or do not wish to take on regulatory responsibility, a retail or industry super Fund may be a better option.
Before establishing an SMSF or undertaking significant transactions within one, it can be helpful to seek professional advice. An accountant, financial adviser, or SMSF specialist can help assess whether an SMSF aligns with your financial circumstances and ensure ongoing compliance with the law. In addition, there’s a heap of guidance and videos available on our website or the ATO website to make sure Trustees get all the resources they need.
Final Thoughts on SMSF Investment Rules
SMSFs offer greater control and flexibility, but they operate under strict legal requirements. Trustees must ensure all investments meet the sole purpose test, align with a properly documented investment strategy and comply with rules around related-party transactions and personal use of assets. Even where exceptions apply, such as with business real property, transactions must be conducted at market value and on arm’s length terms.
While the ATO may take an educational approach to minor breaches, Trustees are ultimately responsible for compliance. Serious or repeated breaches can result in significant penalties, loss of tax concessions, or even the Fund being made Non-Complying.
An SMSF can be an effective retirement structure when managed carefully and correctly. If you are unsure about your obligations or considering changes to your Fund, seeking professional advice can help protect your retirement savings and ensure ongoing compliance.