What can an SMSF invest in?

With headlines this week (24 August 2015) such as:

“AUSTRALIAN shares have taken their biggest tumble since the global financial crisis with $59 billion stripped from the market as uncertainty grips global markets”

It’s no wonder why over one million Australian’s have chosen to take more control over their superannuation and set up a self-managed super fund (SMSF).

A big reason why SMSFs continue to gain popularity is the wider array of direct investment opportunities available to them through this type of structure.

Direct Investments

Some common questions people ask around direct investments include:

  • What direct investments are most common for SMSFs?
  • Are such direct investments suitable for my SMSF and my retirement goals?

Typically, the most common investment types of direct investments for SMSF funds are:

The Appeal of Property inside an SMSF

Both residential and commercial property are very popular investment options for SMSF trustees as ‘property’ as an asset class is typically one that Australians are comfortable investing in.

There’s a pretty good chance that you have had some experience in buying and selling property; whether that be your principal place of residence (home), an investment property, or even just watching mum and dad buy their own property and possibly sell it for a profit.

As an investment preference, Aussies love investing in direct brick and mortar property.

An element that has driven the volume of Australians setting up an SMSF is the ability to make your existing super balance a deposit and add to that with borrowed funds to invest and control a property asset of significantly more value that was represented by the initial super balance.

The qualifications, criteria and regulations are a little different than buying property outside of superannuation, but it is fundamentally the same concept.

To learn more about buying property inside a Self Managed Superannuation Fund (SMSF) download our Fact Sheet

Let’s look briefly at the more popular investments held within SMSFs

Cash and Fixed Interest

Cash and fixed interest has always been popular in Australia among superannuation funds and SMSFs due to its ‘set and forget’ nature. This, combined with the stability and security of the Australian monetary system, provides a very low risk, low labour type investment. However, as is the case with all investments, low risk usually means low returns.

Direct Shares

Direct Share investment has equally been as appealing for many SMSF trustees. Trustees may choose to trade themselves through online tools and portals or enlist the services of a trusted stockbroker. Many Australian SMSFs trade listed securities on the Australian Stock Exchange (ASX) and have done very well with the extra control over their trading. This however comes with the added need for regular education, updates and ability and time required to effectively trade with your superannuation.

Managed Funds

SMSFs have the ability to invest in a wide range of managed funds and portfolios that offer greater exposure to diverse markets, companies and industries. However, if the sole purpose of setting up an SMSF is to place your funds in a ‘managed service’, the question has to be asked; is it even worth it? Essentially your traditional superannuation fund is a managed service. The whole point of an SMSF is to open up new investment opportunities and take more control over your funds and how they are invested.

Residential Property

The ability to borrow funds and invest in property has been one of the biggest draw cards for Australian’s in setting up an SMSF. It can be very advantageous as it allows a relatively small superannuation fund of say, for example, $150,000 to be able to purchase a larger asset of say $350,000.

Put simply, your fund now controls an asset worth $350,000 instead of $150,000 and owns the income and capital growth that the more valuable asset delivers over time. In this example, when the $350,000 property doubles in value the SMSF will now control an asset valued at$700,000, without adding to or increasing the debt level. It’s this power of leverage allowed only in superannuation funds that are self managed that makes SMSFs so appealing to so many, understandably.

Buying property inside a Self Managed Superannuation Fund (SMSF) download our Fact Sheet

Commercial Property and Business Premises Investments

We all know the ‘sole purpose test’ with SMSFs and how they are heavily restricted in providing pre-retirement benefits to the trustee or benefits to a related party. However, there is one exception to this. SMSFs can purchase commercial property for the use of your own business. The only requirement is that your business must pay a fair market rental rate to your SMSF.

Other Assets

Apart from the above listed traditional assets, SMSFs are also able to invest in slightly more exotic and niche investments. One popular investment within this ‘other’ category is fine art or precious metals. Again, these must strictly meet the sole purpose test and cannot be benefitted from prior to retirement. Likewise any rentals must be at fair market rate and to a non-related party.

What Next Warning

It is highly advised that you seek financial advice before setting up an SMSF. And even more highly advised that advice be sought when considering straying from more traditional asset investments with your SMSF. The penalties can be severe and include criminal charges.

Send me your SMSF questions, using the hashtag #SMSFQuestions >>>here or simply pick up the phone, dial 1300 883 854 and speak with us.

Your future is too important to not have your investments sorted right the first time. Don’t guess, don’t wonder and don’t ask the wrong people - ask the advice of a specialist today.

Buying property inside a Self Managed Superannuation Fund (SMSF) download our Fact Sheet

Partnering with you for your investment success,

Nick Lockhart

Contact us or call us today on: 1300 883 854

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