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Self Managed Super Funds

Self Managed Super Fund: Investment Rules

The ATO has recently released two rulings, which consider some of the important investment rules that set out how the ATO expects SMSF trustees will use superannuation money.

Editor: Because the superannuation laws allow for very concessional tax treatment of money invested in a superannuation environment, there are very strict rules about what trustees can and can’t do.

Two of these investment rules are:
• The ‘sole purpose test’ (i.e., basically, the SMSF must be run solely to provide benefits on members retirement or death); and
• The prohibition on an SMSF using fund resources to provide financial assistance to a member, or a relative of a member.

The rulings provide a number of examples regarding these two investment rules, three of which are reproduced below.

Example 1 – Separately negotiated benefit: more than an incidental benefit
An SMSF trustee invests in a non-related company that owns a block of holiday apartments at a popular tourist destination.

The members of the SMSF holiday in this area every year and prior to making the investment owned a separate holiday house nearby.

The trustee, when undertaking the investment, negotiated for members of the SMSF to be able to stay at the apartments for free. This is not a standard feature of the investment.

In return, the SMSF was required to accept a reduction in dividends payable by the company.

The members of the SMSF sell their holiday house immediately after the SMSF makes the holiday apartment investment.

The separate negotiation of the benefit, which materially affects the return on the SMSF’s investment, demonstrates that the benefit is purposeful and not incidental.

The facts reveal that the SMSF is being maintained for a purpose of providing benefits other than those specified by the superannuation law and, therefore, indicate a contravention of the sole purpose test.

Example 2 – Selling an asset for less than market value
Robert is a trustee and member of an SMSF. The SMSF’s portfolio of assets includes a block of land located in an inner city suburb where land values have risen significantly
in recent years.

Robert sells the asset to his son for $210,000. Two months prior to the sale, the block of land was independently valued at $300,000.

The sale of the land by Robert to his son for less than market value contravenes the prohibition on an SMSF providing financial assistance to a relative of a member (Editor: And probably the sole purpose test, as well).

Example 3 – Purchase of an asset by an SMSF for greater than market value
Andrew is a member and trustee of an SMSF. Andrew needs to raise $100,000 for personal reasons.

He owns a block of land that qualifies as business real property and has been independently appraised as having a market value of $80,000.

As trustee of the SMSF, Andrew agrees for the SMSF to purchase the land for $100,000.

The purchase of the land by Andrew as trustee of the SMSF for greater than its market value is the giving of financial assistance to himself (a member) and therefore contravenes the superannuation law.

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Paul Baggetta is the Founder & Principal of Baggetta & Co (ABN 68 786 233 813).

Paul Baggetta has been a Taxation Accountant since 1981, a Financial Planner since 1998, and in 1993 qualified as a Real Estate Licensee, holding a Triennial Certificate (currently not trading) and operated his own Real Estate business for property investment clients for over 5 years as a second business.

Financial planning services are provided by Paul Baggetta as an Authorised Representative (No. 261469) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. Australian Financial Services License No. 223135.


Taxation & Accounting services are provided by Paul Baggetta as a Registered Tax Agent (No.61487008) and is a Member of SMSF Association, FIPA & NTAA.