Independent Superannuation Services does not provide investment advice, recommendations or specific commentary on individual investments in shares, property or bonds. We do not receive fees commissions or trails from any source. We expect that sensible clients will take advice from well-qualified experienced investment advisers who have as their prime objective the protection and promotion of the interests of clients.
Personal references from other professional advisers who have experienced a history of service and performance from an adviser are a useful start in finding a suitable adviser. A good adviser, at a well-resourced firm, will usually have strong educational qualifications, good personal references and a commitment to service and performance for each and every client. Never be afraid to ask the hard questions of an adviser many of which can be found at www.asic.gov.au .
We recommend avoiding advisers who charge up front fees, fees for preparing investment plans, receive trails from investments, or receive asset based fees in wrap products. There are advisers where the client will pay only a competitive rate of brokerage on listed shares, bonds, or property trusts, without trails, upfront or exit fees.
We do believe that direct investment in stocks, bonds and listed property trusts will provide the best available tax outcome, the most liquidity and the least cost for the investor. A suitable adviser should be qualified to understand the tax consequences of investment decisions, be capable of assisting to produce an Investment strategy, and have a thorough knowledge of all investment markets and investment issues.
Investment Strategy
Trustees of self-managed super funds are required to prepare and implement an investment strategy for their fund and regularly review the strategy. This requirement is to ensure that the best possible investment decisions are being made for the fund. The investment strategy must reflect the purpose and circumstances of the fund and consider:
- Investing in such a way as to provide sufficient member returns, taking into account the risk associated with the investments
- Appropriate diversification and the benefits of investing across a number of asset classes (for example, shares, property, fixed deposit etc.) in a long-term investment strategy.
- The ability of the fund to pay benefits as members retire and pay other costs incurred by the fund, and
- The needs of members (for example age, income level, employment pattern and retirement needs).
An appropriate investment strategy should set out the investment objectives of the superannuation fund and detail the investment methods the superannuation fund will adopt to achieve these objectives.
An investment strategy should be unique to the requirements of a particular fund and its members, and should be reviewed regularly and updated as required. It should allow trustees to be able to measure investment performance against their retirement income goals.
Trustees must ensure that all investment decisions are made in accordance with the investment strategy.
Trustees should be able to demonstrate through trustee minutes or other documentation that they have taken into account all the circumstances of the fund in formulating the investment strategy. Trustees may seek professional advice in formulating the investment strategy, however this does not reduce their responsibilities or obligations. Any professional advice received should be documented.
Investment restrictions
SISA (Superannuation Industry (Supervision) Act 1993) restricts some investment practices of superannuation funds. The investment restrictions aim to protect superannuation fund members from being overly exposed to undue risk (for example, an associated business failing). Secondly, they aim to ensure that superannuation funds make investment decisions with the sole purpose of generating retirement benefits for members rather than providing current day support.
Investment rules are one of the most important requirements of SISA and failure to comply with the rules could result in trustees being fined and/or the superannuation fund losing its complying status.
Loans or financial assistance to members or a member's relative
Trustees are prohibited from lending money or providing financial assistance from the superannuation fund to a member or a member's relative. The use of a superannuation fund asset by a member or a member's relative for no cost or as a guarantee to secure a personal loan for example would be in breach of this investment restriction [SISA s65 (1)].
Borrowings
SMSFs are prohibited from borrowing money except in certain limited circumstances. Trustees are able to borrow for a maximum of 90 days to enable the trustee to make benefit payments or pay a surcharge liability if the borrowing does not exceed 10% of the fund's total assets. In specified circumstances trustees can also borrow for a maximum of 7 days to cover the settlement of security transactions if the borrowing does not exceed 10% of the superannuation fund's total assets (SISA s67).
Acquisition of assets from 'related parties'
Trustees are prohibited from acquiring assets from a 'related party' of the superannuation fund. The limited exceptions to this rule include assets acquired at market value, if:
- the acquisition is an 'in-house asset' which, after being acquired by the trustees would not result in the level of 'in-house assets' of the superannuation fund exceeding more than 5% of the superannuation fund's assets;
- the asset is a listed security (for example, shares, units or bonds listed on an approved Stock Exchange);
- the asset is 'business real property'. (SISA 66)
'Business real property' of an entity generally relates to land and buildings used wholly and exclusively in a business. Trustees of SMSFs are permitted to acquire up to 100% of the fund's total assets as 'business real property'.
Related party of a fund
A 'related party' of a superannuation fund covers all members of the superannuation fund and their Part 8 associates and all standard employer sponsors of the superannuation fund and their Part 8 associates (SISA s10).
Part 8 associates of members include their relatives, partners and any companies or trusts that they control (either alone or with their other Part 8 associates).
Part 8 associates of standard employer sponsors include partners and any companies or trusts that the employer controls (either alone or with their other Part 8 associates) or companies and trusts which control the employer.
In-house assets
'In-house assets' are loans to, investments in, and assets subject to a lease or lease arrangement with a related party of the superannuation fund. In general, SMSFs are restricted from lending or leasing more than 5% of the superannuation fund's total assets to a related party of the superannuation fund and are generally restricted from investing more than 5% of the superannuation fund's assets in a related party of the superannuation fund [SISA s66 (2A)].
Some exceptions do exist, including allowing an exemption for 'business real property', which is subject to a lease between the superannuation fund and a related party of the superannuation fund.
In addition SMSFs may invest in a unit trust or a company, without that investment being considered an 'in-house asset', if certain conditions are met [Superannuation Industry (Supervision) Regulations 1994 (SISR) 13.22C]. The main conditions being that the trust or company:
- does not borrow;
- has no assets with a charge over them;
- does not loan money to individuals or other entities (other than deposits with authorised deposit-taking institutions);
- does not acquire an asset from a related party of the superannuation fund other than business real property acquired at market value;
- does not directly or indirectly lease assets to related parties, other than business real property;
- does not conduct a business; and
- conducts all transactions on an arm's length basis.
Investments to be made and maintained on an 'arms length' basis
Investments by SMSFs must be made and maintained on a strict commercial basis. The purchase and sale price of assets and the income from assets held by the superannuation fund should always reflect a true market rate of return (SISA s109).
Some common issues about investments
Investment in art
Fund investments should be made with the fundamental objective of providing for the members' retirement. Trustees should seek expert advice on the potential income, capital growth and liquidity of the asset before acquiring any non-traditional asset including art. Trustees should consider the costs associated with the storage and insurance of the art. Also, where a fund acquires an asset, which is utilised by the member at no cost, a breach of the sole purpose test may have occurred. An example would be if the art is housed in the business premises or residence of a member at no cost to the member. These arrangements may breach other requirements of the SISA including the in-house asset provisions and the requirement to deal at arms length.
Discount card shares
Trustees of SMSFs may acquire publicly listed discount card shares, provided the investment is in accordance with the fund's investment strategy, and the SMSF does not participate in a discount plan where the trustees agree to a regular debit of their dividend payments.
Certain shareholder discount plans require the purchase of a nominal number of publicly listed Discount Card shares which entitles a shareholder to participate in the Shareholder Discount Plan provided they agree to a regular debit of their dividend payments. The shareholder may then obtain discounts on purchases from particular stores.
In such arrangements, the discount shareholder card can not be viewed as an incidental benefit to a member because the dividend payments resulting from the shareholding are reduced in order to pay for participation in the discount shareholder plan. This is a direct use of the fund's income to pay for a current benefit enjoyed by a member and is not consistent with paragraph 62(1)(a) of the SISA which requires that the trustee ensure that the fund is maintained solely for at least one or more of the specified core purposes.
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