What is a self-managed superannuation fund (SMSF) investment strategy?
A self-managed superannuation fund (SMSF) investment strategy is a plan that outlines what your fund can invest in.
Each SMSF is legally required to have one, and all subsequent investment decisions must be made in line with this strategy.
The fund’s investment objectives form the backbone of the investment strategy and should reflect the needs and preferences of each SMSF member. The age of the fund members, their retirement needs, their attitudes toward risk, and whether they are in their accumulation or pension phase should all be taken into account when drawing up these objectives, which should include some measurable benchmarks, such as an average yield from all investments of 5%.
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These objectives provide a rough outline for the investment strategy, which must then explain in greater detail the types of investments the fund will make. Typically, this involves explaining the fund’s approach to the following:
- Diversification – a popular risk management strategy, diversification can be achieved through: investing across a range of asset classes; investing in numerous assets within an asset class; investing in multiple countries; and investing in funds with different management styles. An investment strategy must break down how it intends to diversify its portfolio and how it plans to manage the risk more broadly. For example, if the fund is being used solely for property investment, the investment strategy could state that the fund will invest in both commercial and residential property, so that its exposure to downturns in either market is reduced.
- Risk and return – depending on their financial circumstances, not all SMSF members will want to pursue risky investments, and so the investment strategy should detail the fund’s level of acceptable risk.
- Liquidity – the investment strategy needs to address how the fund will ensure it has enough liquidity to meet its tax payments, pension payments, administrative costs and other liabilities. For example, it could stipulate that the fund must hold a cash reserve or an investment that can be sold quickly (i.e. something other than a property).
- Insurance – finally, the investment strategy should address whether it will hold insurance cover for each of the fund’s members.
It’s worth noting here, too, that, if the fund’s members have very different needs, the trustees could segregate member accounts and draw up different investment strategies for each one.
What can a SMSF invest in?
A SMSF can invest in a wide range of assets, including:
- antiques and collectables
- ASX-listed securities and warrants
- international shares
- Australian and international funds
- foreign exchange
- metals and commodities
- term deposits
- residential and commercial investment properties.
They can’t, however, be used to buy a home for one of the members to live in, and each of the fund’s investments must meet certain criteria.
Firstly, the ATO states that each investment must be made at arm’s length. This means that fund assets must be bought and sold at market value, and income on these assets must reflect their true market rate of return, even when the trustees are dealing with someone to whom they are related.
And secondly, each investment must meet the sole purpose test of providing retirement benefits to fund members. This means that, other than increasing the fund’s balance, assets cannot provide benefits to members before they retire. So, for example, using a SMSF property as a holiday home or renting one to a family member is not allowed.
How can I set up a SMSF?
Running a SMSF is a risky endeavour. To manage one successfully, you need to have a strong understanding of the economy and enough wherewithal to handle the endless reams of paperwork. And the price of failure is waving goodbye to the stress-free retirement for which you’ve spent decades working.
However, using a SMSF to buy property does offer plenty of benefits – such as a tax rate of 15% – and so, if you’re an experienced hand who relishes a challenge, or an investor with enough money to pay a financial advisor to manage the fund for you, then here’s how to set one up.
1. Consider appointing professionals to help you set up SMSF
While it may sound counter to the very essence of a SMSF, most trustees engage one or two professionals to help them set up the fund. An accountant, a tax agent, or an administrator is usually enlisted to help the fund meet its reporting and admin obligations with the ATO, and a legal practitioner is often asked to advise on the setting up of the trust deed. Wealthier investors often hire a financial advisor, too.
2. Determine the trustee structure
Each SMSF can have between one and four members, which can either be individuals or companies. Given the nature of SMSFs, these trustees are often family members.
3. Sign the trust deed and trustee declaration
The trust deed is a legal document that covers how to establish and operate your SMSF. It must be set up by a qualified professional, and it must be signed and dated by the trustees so that it is executed properly under the law. Each trustee must also sign a trustee declaration within 21 days of becoming a trustee, to show that they are aware of their duties and responsibilities as a trustee.
4. Register your SMSF
You need to register your SMSF with the Australian Business Register within 60 days of establishing the fund. When you do so, you should also elect to be regulated by the ATO and provide each of your member’s TFN so that you can save on tax.
Once registered, your SMSF will be listed on the Super Fund Lookup, which allows employers to check your fund’s eligibility to receive rollovers and contributions. After then, you’ll need to sign up with a SMSF messaging provider so that your fund can receive employer contributions.
5. Set up a separate bank account (super member account)
You need to open a bank account in your fund’s name to manage the fund’s operations, accept income and contributions, and pay the fund’s expenses and liabilities. You do not need to set up an account for each member, but you must keep a record of their entitlement, which is known as a member account.
To learn more about setting up a self-managed superannuation fund, visit the ATO’s website here.