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SMSF – Your questions answered, day six – is your SMSF playing by the rules?

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Could you give us some guidance on the rules on what you can invest in within our SMSF? We have assets we would like to put into the fund but can we do that?

As a trustee in a SMSF, you have to comply with strict rules when making investment decisions to ensure that assets are properly invested for retirement purposes and member benefits are protected.

The main investment rules are:
  • You have to have an investment strategy
  • You make investments on an arm's length basis
  • You have tight guidelines for borrowings by the fund
  • There are rigid rules governing lending or giving financial help to members
  • Strict guidelines on putting assets into the SMSF which come from members or related parties
  • Same applies to in-house assets.

Break these rules and your fund could be ruled non-compliant meaning the tax benefits could be lost and there could be tough penalties as well.

Investments by a SMSF must be made on a commercial basis. That means the purchase and sale price of the assets are priced at true market value for the asset and if there’s income from the assets eventually held by the fund, it must reflect a true market rate of return.

Lawyers say the general test is whether a prudent person acting with due regard to his/her own commercial interests would have made such an investment.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Wednesday, December 29, 2010

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