How an SMSF purchases investments. 6 Steps to follow?

In a recent blog entry I spoke about what investments a SMSF can invest in and went through some of the options in detail. This article is more on the process of “How you invest through your SMSF”.  There are steps to follow in guiding you through the process of investing in any asset within Superannuation. Almost anything you can invest in as an individual, you can also invest in within a SMSF. However, here are six steps in the Investment Process which should be followed when making investments for your SMSF in order to ensure that your SMSF remains compliant with all the Superannuation Rules and Regulations.

Step 1: Read the Deed! Review Investments Allowed by your Trust Deed

Prior to making an investment for your SMSF, you should make sure that the intended investment is permitted. The range of investments that a fund can invest in is quite broad including listed shares, cash and fixed interest securities, managed investments, private unit trusts, direct residential and commercial property and other collectibles. It is important to understand that there are certain regulatory limitations placed on SMSFs; for example, a fund cannot acquire assets from related parties of the fund or invest more than 5% in in-house assets. The fund cannot purchase your assets, such as your holiday home, from you or a related party such as your parents, spouse or children. Other restrictions placed on the fund include the prohibition on lending funds to members or their relatives or to provide the assets of the fund as security for personal borrowing.

Step 2: Review and possibly amend your SMSF Investment Strategy

The regulations require that all SMSFs and superannuation funds in general need to have an investment strategy in place that is reviewed regularly. Generally, this will mean having a clear objective that takes into account the desired target rate of return, risk tolerance of the members and of investments, diversification needs, the liquidity of the funds’ investments, as well as the ability of the fund to meet accounting, tax and audit fees. Most importantly the ability to make payments to members or their beneficiaries should the need arise via pensions, disability or death. Overall, before any investment is made you must ensure that the investment complies with your Fund’s Investment Strategy and if it doesn’t then consider why you really want to engage in that investment and the risks involved. If you still wish to proceed then the trustees need to amend the current strategy to allow the new investments and should minute why the change has been considered and approved.

Step 3: Second Opinion / Lifetime Value of Investment

Check the accounting and tax implications of any investment with your Accountant / SMSF Specialist Advisor™. It is always a good idea to have a second opinion as you may be looking at the investment with a narrow focus and your advisors may be able to identify other factors to be considered which affect the viability of the investment from a pre or post tax viewpoint both at the purchase and sale point of the investment . An example would the current spate of bank hybrid issues which seem attractive at 7.5 – 8% yield, however with franking credits and growth potential you advisor may suggest that you buy the share rather than the hybrid especially while rates are under pressure and looking at going lower which reduces the return on a floating rate hybrid.

Step 4: Use your SMSF Bank Account for all investment transactions

Your personal funds must be kept separate from the assets of the SMSF. The ATO used to have a booklet called ”It’s your money…but not yet!” All investment holdings, money and title deeds should be clearly recorded as an asset of the SMSF or in the name of the SMSF Trustee (with exception for assets under a Limited Recourse Borrowing Arrangement). This means SMSF assets need to be registered in the name of the SMSF Trustee(s).

  • Cash should be kept in a separate bank account and we recommend a different bank to your day to day personal banking to avoid mistakes especially in online banking or use of cheque books.
  • Any income including, interest, dividends, distributions and contributions should be paid directly to the SMSF bank account.
  • Assets should be purchased with SMSF money. Trustees often pay deposits personally and if they do so should seek reimbursement immediately from the fund or document the funds as contributions on behalf of a member. Simpler to just keep everything separate.
  • Costs should be paid directly out of the SMSF account. Again in reality people often use personal funds to meet expenses like Accounting Fees or repair bills. Do yourself a favour and lose the bad habit! Use a decent Cash Management Account and you can do Bpay, Pay Anyone or use cheques to meet costs quickly and record them efficiently.

Step 5: Minute your Investment Decisions

Under superannuation laws, all trustees must draft and implement an investment strategy. An investment strategy must also comply with the fund’s trust deed and all other investment restrictions and obligations contained in the superannuation rules and regulations. Documenting investments can be based on investment sector allocations within your SMSF Investment Strategy. This means you don’t have to minute every investment as long as it fits within the strategy.  E.G. , you don’t need to prepare a separate minute for each term deposit renewal during a year if it is within your chosen limit in the investment strategy..

Step 6:  Review you portfolio and investment strategy regularly

Trustees are required to review the fund’s investment strategy regularly and we recommend that this be at least annually. We normally get the Trustees to sign off an updated copy of the investment strategy annually or whenever a major new investment is made for the fund or a change in circumstances like pension drawdown occurs. On moving to pension phase the Trustees may find that the asset allocation needs to change to ensure the fund can meet its ongoing pension payments and this should be noted in a revised strategy.

I hope these tips  have been helpful and please take the time to comment if you know of other steps to consider as I know this is not an exhaustive list. Feedback always appreciated. Why not contact our Castle Hill or Windsor offices for an appointment.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

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