Your Fund Must Have a Written Investment Strategy

Every SMSF trustee is required by law to prepare, give effect to and regularly review a written investment strategy. You can choose which asset classes the fund invests in and how it diversifies, but every investment has to be consistent with that strategy.

Under the Superannuation Industry (Supervision) Act 1993 and its regulations, the strategy has to consider:

• Risk and return — the risk involved in each investment and the return the fund can reasonably expect.
• Diversification — and the risk of holding too much in a single asset or asset class, which is a real issue when one property is most of the fund.
• Liquidity — whether the fund can turn assets into cash when it needs to.
• Paying its way — the fund’s ability to meet expenses, tax, loan repayments and member benefits as they fall due.
• Insurance — whether the fund should hold insurance cover for its members.

The ATO’s investment strategy guidance sets out what it expects to see. Our SMSF investment strategy guide walks through how to build one around your retirement goals.

Trustees Carry the Responsibility

As trustee, you choose the fund’s investments, monitor how they perform and review the strategy to make sure the fund is still on track. You’re also accountable for the fund’s day-to-day management. Advisers can help, but the decisions, and the consequences, sit with you.

Diversification Comes Before Property

Before choosing any particular investment, weigh up the risk and the likely return. Diversification spreads the fund across different asset classes to reduce the swings in its returns. How far you diversify depends on how long members have until retirement, how much is in the fund and what it needs to pay out.

An SMSF can hold residential and commercial property, shares, managed funds, cash and term deposits, among other assets. Many financial planners aren’t licensed to advise on direct property, which is why property often gets left out of the conversation, or included without the analysis it needs. Our Strategy Before Property approach puts the fund’s strategy first and the property second.

Buying Property in Your SMSF Today

Very few properties are investment grade, and fewer still suit an SMSF. Getting the choice right at the start matters more inside super, because the fund can’t easily top up a shortfall or sell part of a property.

The Rules Every SMSF Property Must Meet

• Sole purpose test — the property must be held to provide retirement benefits, not a benefit today. You, your family and other related parties can’t live in or rent a residential property owned by the fund. See the ATO’s sole purpose test guidance.
• Related parties — residential property generally can’t be bought from a member or related party. Business real property can, at market value.
• Arm’s length — the price, rent and any lease must reflect genuine market terms.
• Where there’s a loan — for commercial property, or a residential LRBA already in place before the change, the property is held in a separate holding (bare) trust until the loan is repaid. Borrowed money can pay for repairs and maintenance but not improvements, and the fund can’t change the property into a different asset while the loan is in place.
• Cash flow — rent has to cover the holding costs and any loan repayments, with member contributions (within the caps) covering any shortfall. A property with stronger rent and low maintenance usually suits a fund better than one that relies on growth alone.

Choose the property on the numbers, not on emotion.

Leverage: Where It Still Applies

Where borrowing is still allowed, mainly commercial property, leverage lets the fund control an asset worth several times its deposit. Capital growth applies to the full value of the property, not just the money the fund puts in. Losses, interest costs and vacancies are magnified in the same way, so the fund’s cash flow and strategy have to be able to carry the loan. Our SMSF Loans page explains how gearing works inside super, and properT network’s guide to strategy before property covers how we assess any purchase.

General information only. This page does not take into account your personal circumstances, financial situation or objectives. SMSF, superannuation, tax and property decisions involve significant legal, financial and tax considerations, and the rules can change. Before making a decision, get advice from appropriately qualified and licensed professionals. See our full Disclaimer & Important Information.