Things you can buy and must do

The main rule is what ever you buy must be for the sole purpose for your retirement, for paying your super benefits, or paying your dependents or your estate upon your death.

1. Types of Investments you can buy (including Collectables & PUA’s)
2. Types of expenses you can pay for such as
3. Things you can do
4. What I must comply with (Sole Purpose Test and Investment Strategy)
5. What documents do I need to prepare/keep. (incl Fin.Reports and Valuations of Assets)

Types of Investments you can buy

• Collectables & personal use assets – must comply with new rules from 1.7.12, these include but are not limited to:
• Precious metals
• Property
• Derivatives including warrants, options,
• Shares, including ESS where the SMSF of the employee is the recipient of the shares/options <ATO-Link>
  • must not be leased to any related party of the funds
  • must not be stored or displayed in the private residence of any related party of the fund
  • trustees must make a written record of the reasons for the decisions on where to store the collectables and personal use assets and keep the record for 10 years
  • trustees must ensure that collectables and personal use assets (other than a membership of a sporting or social club) are insured in the name of the fund within seven days of acquisition
  • collectables and personal use assets cannot be used by any related party of the fund
  • the transfer of ownership of collectables and personal use assets to a related party of the self-managed super fund must be done at a market price determined by a qualified independent valuer.
  •  here’s what the ATO has to say <ATO-Link1><ATO-Link2>.
  • where the collectable does not meet these rules then the asset can become an <in house asset>.
  • The rules apply to all new investments in these assets made on or after 1 July 2011.

For assets acquired before 1 July 2011, you have until 1 July 2016 to make sure they are being kept by the fund in accordance with the rules. If by 1 July 2016 the assets do not comply with the regulations, penalties may be imposed.

A question & answer page about collectables/personal use assets on the ATO website may be helpful for your client see <ATO-link>.

Therefore, when new personal use assets such as artwork/Jewellery etc are purchased after 1/7/11, we will request the following:

1. Copy of the insurance certificate for the new personal use asset that was obtained within 7 days from the purchase of the asset
2. Copy of the trustee minute detailing the ‘reasons for the decisions on where to store the collectables and personal use assets’ as per above.
3. Proof the personal use asset is not stored at a related party’s residence and copy of any lease agreement in place.

Show in the tax return the value of the collectables/personal use assets – there should be a separate box for collectables/personal use assets

Types of expenses you can pay for such as:

• Education expenses regarding investment purchases,
• Publications tracking your investments,
• Software managing your investments,
• Property maintenance expenses including interest on using a loan to purchase property.
• Insurance

Things you can do

There is not definitive list of what activities a SMSF can engage in, but there are rules as to what you need to consider such as the <sole purpose test> listed below, some of the activities a SMSF can do are as follows, however we invite other practitioners to add further comments to this page below:

Renting Commercial Property – Your employer sponsor (your business) can lease a commercial property owned by your SMSF.

Ownership of property with yourself – You can buy a property in your own name and with the superfund as tenants in common, but be aware of the risks and make sure the structuring of ongoing arrangements does no breach the sole purpose and investment strategy, (see what you must comply with below).

You can invest in a private unit trust –  provided the unit trust does not borrow (however you can borrow under a bare trust arrangement to purchase the units). Further be aware of the anti avoidance arrangements for example where the unit trust lends money to a related party, i.e. the unit trust cannot be used as an interposed entity.

You can do a property development – although you should seek advice as to what level of development may be considered ok, making sure you do not change the asset (single acquirable asset). The use of a unit trust maybe a solution, to find out more <click here>.

What I must comply with

You must comply with the laws, these include the following tests:

• Sole Purpose test (s62) -Your SMSF needs to be maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement. If you or any party directly or indirectly obtain a financial benefit when making investment decisions and arrangements (other than increasing the return to your fund), it’s likely your fund will not meet the sole purpose test. When investing in collectables such as art or wine, you need to make sure that SMSF members don’t have use of, or access to, the assets of the SMSF. The most common breaches of the sole purpose test are (1) investments that offer a pre-retirement benefit to a member or associate (2) providing financial help or a pre-retirement benefit to someone, to the financial detriment of your fund. Read more in <SMSFR 2008/2>Here’s what the ATO has to say <ATO-Link>

• Investment Strategy (s31) -Your investment strategy provides you and the other trustees with a framework for making investment decisions to increase members’ benefits for their retirement. It should be in writing so you can show your investment decisions comply with it and the super laws. When preparing your investment strategy, you need to consider: (1) diversification (investing in a range of assets and asset classes) (2) the risk and likely return from investments, to maximise member returns (3) the liquidity of fund’s assets (how easily they can be converted to cash to meet fund expenses) (4) the fund’s ability to pay benefits when members retire and other costs the fund incurs (5) the members’ needs and circumstances (for example, their age and retirement needs) (5) specifically whether insurances are appropriate for the member(s).

  During 2013 tax year the trustees were required to consider whether to hold insurance for their members when they formulate, regularly review and give effect to the fund’s investment strategy – SIS Reg 4.09. As the requirement to consider the insurance needs of fund members will now essentially form part of an SMSF’s investment strategy, a trustee will need to consider whether insurance is required when developing a fund’s investment strategy, as well as during any regular review of the investment strategy.

  The fund’s full investment strategy, which now includes the requirement to consider insurance, should typically also be reviewed following the occurrence of other significant events such as when a new member joins or leaves the fund, or when the fund commences to pay a pension. Importantly, the new regulations do not impose a requirement that an SMSF actually obtains an insurance policy. SMSF trustees will simply need to consider the personal circumstances of fund members when preparing or reviewing the fund’s investment strategy. In doing so, the trustees will need to determine whether the fund should hold an insurance policy that provides insurance cover for some or all of its members.

  Here’s what the ATO has to say <ATO-Link>

What documents do I need to prepare/keep.

You, the trustees, must maintains all records for operating the SMSF covered by sections 100 to 109, with certain records being maintained for 10 years, these include but are not limited to:

• A investment strategy
• Annual minutes of trustee
• Financial Reports – how they are prepared Valuation of assets

Your Accountant or Advisor normally assists you with this paper work. The investments you purchase must be in line with the investment strategy, you can find examples of an investment strategy and minutes on the internet or as you advisor, <click here for an example>.

Financial Reports – can be either special purpose or general purpose reports, however the SIS Act provides for particular requirements in terms of reporting,  the ITAA requires certain information fields to be completed in income tax returns and members may need certain information for withdrawal of benefits or commencing or stopping pensions with certain components, all these requirements mean the preparation of financial reports should be prepared by a competent person, preferably a recognised public practitioner.

Valuation of Assets – The trustees have an obligation to record assets at market value – SISR Reg 8.02B.(Also refer to the definition of market value in SISR s10(1)). The ATO have released a guideline regarding the valuation process. See <ATO-link>

The ATO recommend the following valuation principals:

General Valuation Principles – You must be able to demonstrate that the valuation has been arrived at using a ‘fair and reasonable’ process. Generally, a valuation is considered fair and reasonable where it meets all the following:

• I take into account all relevant factors and considerations likely to affect the value of the asset.
• I have been undertaken in good faith.
• It uses a rational and reasoned process.
• It is capable of explanation to a third party

The ATO also states:

We will generally accept your determination of an asset’s value, as long as:

• it does not conflict with the ATO guide or Market valuation for tax purposes
• there is no evidence that a different value was used for the corresponding capital gains tax event it was based on objective and supportable data.

The ATO states in the guidelines that a valuation from a ‘person without formal valuation qualifications but who has specific experience or knowledge in a particular area’ may be acceptable.

We therefore recommend a valuation from a real estate agent to be the quickest and cheapest option for trustee’s who have property in their SMSF.

Also, the super laws require a valuation by a qualified independent valuer in the following circumstances

• From 1 July 2011 for any collectables and personal use assets that were acquired on or after 1 July 2011 and disposed of to a related party
• From 1 July 2016 for any collectables or personal use assets that were acquired by the SMSF before 1 July 2011 and disposed of to a related party after 30 June 2016.

There are requirements for reporting assets at market value from 1.7.12, see the <ATO-link> for valuation guidelines.