The one million club
Nearly 600,000 SMSFs run by more than 1.1 million trustees control more than $650 billion in total assets, as at 31 December 2016. A more impressive statistic is that as at 31 December 2016, SMSF trustees control around a third of all superannuation money (32.4%) held by Australians in both APRA-regulated super funds and self-managed super funds. In 2004, SMSFs controlled only 20% of all superannuation money.
A fascinating aspect of this growth in SMSFs is that the investment behavior of the 1.1 million-plus SMSF trustees is capable of influencing investment markets. According to one investment expert, the desire by SMSF trustees for shares paying franked dividends is driving up the prices of high yield shares, such as bank stocks (despite the recent volatility), while another expert claims the SMSF love affair with companies that pay franked dividends is putting the long-term income of SMSF members at risk as companies review dividend policies, and in turn, SMSF trustees are inadvertently creating higher-risk investment portfolios. Other experts are urging SMSF trustees to invest in overseas investments, while some politicians are eyeing SMSFs as a source of funding for major infrastructure projects.
Another recent example of the clout of SMSF trustees is the interest in SMSF property investment by the professionals in the property market. Due to relaxed borrowing rules (introduced in 2007) and to the ever-growing SMSF fund balances, now averaging more than $1.1 million; estate agents, property developers and banks believe there is money to be made by promoting property, using gearing, to SMSF trustees.
Although the average SMSF balance is more than $1.1 million, the average SMSF account balance is now roughly $594,000 (based on December 2016 figures of $653.8 billion in SMSF assets and dividing this amount by an estimated 1.1 million SMSF members). The higher-than-industry-average account balances reflect the much older profile of SMSF members, and the need to have substantial assets to justify the cost of running a SMSF.
What should you invest your SMSF in?
Having access to a broader range of investments is often cited as a reason for starting an SMSF. Through a self-managed super fund, you can invest in the usual investments such as shares, term deposits, managed funds and property. You can also hold alternative assets such as antiques and artwork in a self-managed super fund.
The ability to choose your own shares may have been a driver for setting up an SMSF, but unless you have a lot of money to invest, you are unlikely to be as diversified as a fund manager, who has the advantage of using pooled funds to buy a broad range of shares.
Some people use their SMSF to invest in property. For information on the rules around property investment within super and the costs involved go to ASIC’s SMSFs and property web page.
Many SMSFs hold collectibles such as artwork, jewellery, antiques, coins, stamps, vintage cars and wine. There are very strict rules on holding these assets in your self-managed super fund.
You can understand your SMSF can be invested in a variety of assets including property and shares. But are you wondering if you are allowed to invest in about smaller personal assets like artwork, wine, war medals, collectibles and boats?
Technically yes, but the rules for holding these types of assets have become so strict that acquiring these assets is recommended. They are also a red-flag for the ATO and your fund may be audited.
For example, artworks can be owned, but:
- They must be fully insured.
- They must be stored in a special storage location away from the owner’s home.
- If they are available for public viewing they must earn a market return (e.g. rent).
- If a gallery rents the artwork from you, displays it and covers the piece under its own insurance policy, you must have additional insurance in the fund’s name.
- If you hang the artwork in your business premises, you are breaking the law, even if you pay rent.
Three most popular investment classes
Year in year out the three most popular investment classes for SMSF trustees are:
- Direct shares
- Cash and
- Direct property
As at June 2015, the three main asset categories represented 70.6% of all SMSF assets. SMSFs held 30.44% of fund assets in direct Australian shares, 25.4% in cash and term deposits, and 14.74% in direct Australian property.
As at September 2016, the allocation to the three main asset categories shifted slightly, but still represented similar allocation, namely 70.5% of all SMSF assets. SMSFs held 30.3% of fund assets in direct Australian shares, 24.8% in cash and term deposits, and 15.4% in direct Australian property.
In the past 15 months, the allocation of SMSF investment towards listed shares has remained steady (32.1% as at March 2014, to 30.44% as at June 2015, and 30.3% as at September 2016), while allocations to cash have dropped again (from 28% as at March 2014, to 25.4% as at June 2015, and 24.3% as at September 2016).
What investments are not permitted in a SMSF?
The Superannuation Industry (Supervision) Act 1993 prohibits certain types of investments. A SMSF:
- Cannot lend money or provide any financial advantage to a member, a relative or associate of a member.
- Cannot borrow except in limited circumstances.
- Must limit investments in, or loans to, ‘related parties’ to 5% of the market value of the fund.
- Cannot buy assets from a member or a relative or associate of a member except for business real property. The exemption for off-market transfers of listed securities and widely held managed funds no longer applies. The new rules state that where a market exists, the purchases must be made on market.
What kind of assets are not allowable investments?
Assets that meet the above conditions such as:
- Geared unit trust
- Investments in a related employer sponsor (i.e. the fund member’s employer).
- Loans to a member.
- Properties which are mortgaged on a full recourse basis.
- Most artwork and collectibles.
What rules must trustees follow?
Trustees owe a fiduciary obligation to beneficiaries to act in their best interests and handle the trust in accordance with the trust deed. Additionally:
- Trustees must act responsibly, honestly and in the best interests of all members. They must invest with care, skill and diligence.
- Trustees must make investments at ‘arm’s length’ and on commercial Any assets bought and sold must be at full market value. Income received from an investment must be the true market rate of return. Any interest paid on limited recourse borrowings must be at market rates for similar types of loans.
Things to weigh up
With great power comes great responsibility and there is no doubt that managing an SMSF successfully requires a lot of expertise, time and money.
It can cost around $2000 to set up an SMSF, but there are also adviser fees, accountant fees and ongoing annual costs to consider. Further, there are rigorous auditing and reporting requirements for an SMSF and the ATO can impose harsh penalties for those who do not comply, so it is vital you get appropriate tax, legal and financial advice.
If you are considering buying a property through an SMSF, the first step should be to speak to a financial adviser about whether this strategy would suit your investment goals, time frame and feelings about risk. Buying property through an SMSF can be a powerful way for business owners to build their superannuation, ensuring you will be able to live the life you want in retirement. However, it’s important to be clear about your obligations and have the time, money and ability to meet them.
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