The three main asset classes that SMSF’s can invest in are:

  1. Managed shares and share related investments;
  2. Bank and fixed term deposits; and
  3. Property

Permissible SMSF investments are relatively straightforward. As long their aim is genuinely to provide retirement benefits for Fund Members, SMSF Trustees are generally heading in the right direction.

Many people dream of setting up an SMSF and filling it with exotic investments like artwork, classic cars and yachts. There are, however, certain rules as to the types of investments an SMSF can acquire. So, let’s take a look at what are deemed to be allowable SMSF investments.

The Sole Purpose Test

The rule of thumb when it comes to selecting investments for an SMSF is that the sole purpose of any investment must be to provide income on retirement for the Members of the SMSF. This means all the assets in the SMSF must have the potential to generate income by the time you retire. You can’t use your SMSF’s funds for your own purposes. In other words, you can’t lend money to friends or family or run a business with your Fund.

Running a Business in an SMSF

An SMSF is not permitted to run a business. Doing so is usually considered a strong indication that the Fund is in breach of the sole purpose test. An SMSF must be administered for the sole purpose of providing retirement benefits for Fund members. Investment decisions must be made for a future retirement benefit, not a current benefit.

Your SMSF must formulate an SMSF investment strategy rather than a business (trading) strategy, and any investment decisions must be in accordance with that investment strategy. Section 52 of the Superannuation Industry (Supervision) Act 1993 states that when formulating your strategy, the following must be taken into account:

  • Risk and return: the risk involved in making an investment, and the likely return on that investment, taking into account your SMSF’s investment objectives and expected cash flow requirements.
  • Diversification: the composition of your SMSF’s investments as a whole and whether the Trustees have considered the appropriate spread of risk across industry sectors, asset classes and countries.
  • Liquidity and ability to discharge your SMSF’s liabilities: the ability of your SMSF to pay taxes, expenses and benefits as they become due.

When setting up an SMSF with Superannuation Warehouse, we provide you with assistance in the form of our investment strategy template.

I. Shares and Share Related Investments

Once your SMSF is established, you can open up a share trading account. This can be with a traditional full service broker or an online broker.

Another good option is to use Separately Managed Accounts – the transaction costs are low and it will assist you, as a Trustee, in acquiring a diversified share portfolio.

“Don’t put all your eggs in one basket” is all wrong. Put all your eggs in one basket and then watch that basket. It is easy to watch and carry one basket. It is trying to carry too many baskets that break most eggs.

— Andrew Carnegie, Carnegie Steel Company, 1835 – 1919

When SMSFs invest in shares, factors to consider are Dividend Payout, Franking Credits, Portfolio Construction and Diversification.

II. Bank and Fixed Term Deposits

First of all, your SMSF should have a bank operating account. This is the main bank account for the SMSF. Superannuation Warehouse is not prescriptive on where to open up your bank account.

Part of your investment strategy can be to put some or all of your Fund’s investments into a fixed term deposit. The great advantage of this is that capital is guaranteed (government guarantee) and a consistent interest income can be earned.

III. Property

You can invest in residential or commercial property. If the SMSF buys a property outright, it’s similar to buying any other type of investment and will be done within the SMSF.

An SMSF can also borrow to purchase an investment property. To facilitate this borrowing, a Bare Trust is set up with a Corporate Trustee (click here for further details).

IV. Gold and Silver Bullion

SMSF also can invest in bullions such as gold and silver. However, Trustees need to be mindful of the Sole Purpose test, and the storage for these assets – commercial premises. For more info on the provider for this kind of investment, please see more at Ainslie Bullion.

Bullion providers such as Bullion Capital offer bullion products to SMSFs. For more details on Bullion Investments in an SMSF, please see our Gold Investment page here.

Foreign Exchange Gain/Loss

A foreign exchange gain/loss occurs when an SMSF has transactions and investment in a foreign currency and that currency fluctuates relative to the home currency. It can create differences in value in the assets and liabilities, which must be recognised until they are ultimately settled.

Realised and unrealised gains or losses from foreign currency transactions differ based on whether or not the transaction has been completed within the specific financial year.

I. Realised Gains/Losses

Realised gains or losses are the gains or losses on transactions that have been completed. It means that the SMSF has settled or transferred the investment prior to the end of financial year.

II. Unrealised Gains/Losses

An unrealised gain/loss is an increase/decrease in the value of an asset or investment that an SMSF holds but has not yet sold.

Please see here for the ATO link on foreign exchange gains and losses.

Please see the here for the legislation on The Effects of Changes in Foreign Exchange Rates.

FAQs about SMSF investments (click on the question to reveal the answer):

Q: Can I invest in racehorses with my SMSF?

A: In theory, yes; but in practice, no. You could buy into a syndicate – but you’d have to be able to prove the syndicate wasn’t a business (because SMSFs can’t invest directly in a business). You’d also have to prove to the ATO that the investment was going to generate income for your retirement. If you’re a keen punter and you’re known within racing circles for your interest in horses, it’s unlikely the ATO would view your interest in a racehorse syndicate purely as an income-generating venture.

Q: Can I invest in property with my SMSF?

A: SMSFs are expressly prohibited from investing in the family home. They can, however, invest in investment properties – as long as the property is only used for investment purposes. This means Fund members can’t use the property for holiday purposes or rent it out to family members. The property generally needs to be managed by a real estate agent to satisfy the sole purpose test regulations.

Q: How about jewelry, wine and art?

A: You can invest in jewelry. However, if you want to satisfy the sole purpose test, you can’t wear it. Similarly, you can invest in wine through an SMSF – but you can’t drink it. SMSF investments in art operate in a similar way. You can’t display an artwork in your hall at home, but you can rent it to a corporation or an art bank whose business it is to rent out works of art.

Although you may be tempted to use your superannuation to invest in objects d’art and related items, the value of this type of investment is notoriously volatile and the market for these asset classes is generally pretty illiquid. Sure, have a little flutter with a small portion of your fund (within the law) but remember your SMSF is designed to support you in retirement. Investments for the SMSF should be in alignment with your investment strategy.

Q: Can an SMSF invest overseas?

A: Yes, an SMSF can invest internationally. The first step you need to do is to ensure your Trust Deed allows these types of investments. Once the Trust Deed does not exclude the investments, the types of investments the SMSF actually holds are determined by the Investment Strategy, which is formulated in the Trustees’ capacities.

The Investment Strategy should reflect your objectives, risk tolerance, liquidity needs and the investments the Trustees intend to utilise. It can be changed as often as you wish, to suit your changing circumstances and to take advantage of new investment opportunities.

Q: Do I need to disclose unrealised gains or losses when the currency changes?

A: Yes, the unrealised gains or losses in terms of currency changes need to be disclosed in the Income Statement.

Q: What are the Tax implications if an SMSF has US currency and it just sits in the US account?

A: If the US currency remains in an operating account, it will be taxed in the SMSF. If the US currency remains in a Term deposit, then it will not be taxed in that specific financial year. It will be taxed when the currency is transferred to another account or when the term deposit matures.

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