Many of the rules around investing particularly relate to transactions you might enter into with “related parties”.
What is a related party of an SMSF?
The best way to think about who might be a “related party” of your SMSF is to assume that your relatives, your spouse’s relatives, other members of the SMSF and any companies or trusts that these people control, will be a related party. There are exceptions but this very broad definition is a good place to start.
Acquiring assets from a related party of an SMSF
In general, super funds are not allowed to acquire assets from related parties. There is small list of exceptions to this general rule. For example, your SMSF could acquire the following from related parties, as long as the transaction is done at market value:
- a security listed on an approved stock exchange;
- commercial property (although there are conditions to meet for a property to be allowable); and
- units in trusts that are considered ‘widely held’ (for example, managed funds, certain unlisted property trusts with a large number of investors).
There are a few others but these are the most common.
Remember, your fund can acquire assets in a variety of ways – it could buy them in the traditional sense (i.e. pay money for them), but it could also acquire them if the asset was given to the fund as an in specie contribution.
Limits on investments known as "in-house assets"
In-house assets are investments in, loans to or assets leased to related parties. For example, if your fund owns shares in a private company that you control, these shares will be an in-house asset. Similarly, if you lend money to that private company or lease equipment to it, the loan or the equipment will be in-house assets.
In-house assets aren't illegal, they are just restricted. The total amount invested in in-house assets is not allowed to exceed 5% of the total value of the fund’s assets. There are some assets that are specifically exempt from being treated as in-house assets. A good example is commercial property (if it meets certain conditions). In other words, a fund could own a commercial property and lease it to a business controlled by a related party without being subject to the 5% limit.
Loans from the SMSF to members and relatives strictly prohibited
An SMSF can never lend money (or even provide any form of financial assistance) to a member or their relatives and ‘relatives’ are fairly broadly defined for this purpose.
SMSFs can lend money to other parties but remember the restrictions on in-house assets. In other words, if an SMSF lent money to a member’s business, it’s likely the loan would be an in-house asset and limited to 5% of the fund.
Loans to the SMSF are allowed under limited conditions
SMSFs can borrow to invest but only if they take out a very specific type of loan known as a “limited recourse borrowing arrangement” (LRBA). Buying an investment using an LRBA creates some additional complexity and restrictions on what can be done with the investment. Any SMSF trustee considering one of these arrangements should get advice first.
Separation of assets
Trustees must keep their personal and business assets separate from the fund’s assets. All assets of the fund must be appropriately registered in the names of all trustees or in the name of the corporate trustee as trustee for the fund.
For Example
The Smith Superannuation Fund has two individual trustees/members, Peter and Wendy Smith. The fund’s assets should be held in the name of ‘Peter Smith and Wendy Smith as trustee for the Smith Superannuation Fund.’
If Peter and Wendy have a corporate trustee in place, Smith Super Pty Ltd, then the fund’s assets should be held in the name of ‘Smith Super Pty Ltd' as trustee for the Smith Superannuation Fund. Where it’s not possible to use the name of the fund, SMSF trustees should clearly document the fund’s ownership of the asset.
The names of all trustees should be as owners of all assets even if the way the fund is run is that particular assets are earmarked for certain members (e.g. you have two share trading accounts and one is used to invest your super and the other is used for your spouse’s super). This is because legally, the trustee owns all fund assets regardless of whether or not it has chosen to earmark some for one member rather than another.
All investments on an arm’s length basis
SMSF trustees have to make sure all their investments are set up on a commercial footing. Of course, buying something from (or leasing it to) a third party will usually mean everything is done on arm’s length terms. But this is something to be particularly careful about when related parties are involved, or even friends.
For example it’s important the SMSF:
- Pays a market price when it acquires the asset
- Charges a market rent for (say) a property being rented out
- Makes sure the terms and conditions of the lease are followed (rent is paid on time, increased in line with the lease, the right party pays expenses etc).
Again, this is less likely to be a problem if the SMSF is dealing with someone completely unknown to them.
Special rules for collectables and similar assets
There is nothing stopping an SMSF from investing in more niche assets like artwork, coins, jewellery etc. However, there are a whole series of extra rules for investments like these covering things like: insurance requirements, rules that prevent related parties from using them or even storing them, extra documentation and more.
In conclusion
There are very few assets an SMSF simply can’t buy. But there are rules about who they can be bought from, what can be done with them once they’ve been bought and these can mean some investments just aren’t feasible.
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