Self-managed super funds (SMSFs) offer Australians a unique level of control over their retirement savings. However, with this freedom comes responsibility, and it’s crucial to make informed decisions about how best to invest those funds. Here are key considerations to help guide SMSF investment decisions, ensuring you not only meet your retirement goals but also comply with the rules and regulations governing superannuation.

1. Investment Strategy

A well-defined investment strategy is essential for SMSF trustees. Your investment strategy should consider your SMSF’s overall goals, risk tolerance, and the needs of all fund members. This strategy should align with the fund’s objective of growing wealth to support members in retirement while ensuring compliance with the Superannuation Industry (Supervision) Act 1993 (SIS Act).

Considerations:

• Risk Tolerance: Assess the risk appetite of each SMSF member and strike a balance between high-growth assets (like shares) and more conservative investments (like cash or bonds).
• Time Horizon: Younger members may opt for a higher allocation in growth assets, while members nearing retirement may shift towards more stable, income-generating investments.
• Diversification: Avoid over-concentration in any one asset class. Spread investments across shares, property, bonds, and cash to mitigate risks.
• Liquidity: Your SMSF needs enough liquidity to meet its obligations, including pension payments and expenses. Ensure you have assets that can be easily sold if needed.

2. Asset Classes

SMSF trustees have the flexibility to invest in a wide range of assets, but it’s important to understand the risks and benefits associated with each.

Common asset classes include:

• Australian Shares: SMSFs often have a significant portion of their portfolios in ASX-listed shares. Australian shares can offer strong returns through capital growth and dividends, often with franking credits attached.
• International Shares: Diversifying into international markets provides exposure to sectors and economies not available in Australia, helping spread risk.
• Direct Property: SMSFs can invest directly in residential or commercial property, which can provide stable rental income and capital growth. However, property investments are illiquid and often require large amounts of capital, making diversification harder.
• Fixed Interest and Bonds: For more conservative SMSFs, fixed interest securities, such as bonds, provide a steady income stream and lower volatility compared to shares.
• Cash: A portion of the SMSF should be kept in cash for liquidity purposes. While cash may have low returns, it offers stability and quick access for fund obligations.
• Alternative Investments: SMSFs can invest in alternative assets like precious metals, cryptocurrencies, and private equity. However, these can be high-risk and complex, so should only form a small portion of the overall portfolio.

3. Tax Efficiency

One of the significant benefits of an SMSF is the tax advantages, but careful planning is essential to maximise these.

• Concessional Tax Rates: Earnings in an SMSF are taxed at 15%, and capital gains on assets held for more than 12 months are taxed at a reduced rate of 10%. This is generally lower than personal tax rates, making superannuation a tax-effective investment vehicle.
• Pension Phase: Once a member reaches pension phase, the tax rate on income and capital gains for the assets supporting their pension becomes 0%. Structuring your investments to take advantage of this transition can significantly boost retirement savings.
• Franking Credits: Australian shares often pay fully franked dividends, meaning the tax paid by the company on these earnings can be used to offset the SMSF’s tax liability. This can result in substantial tax refunds for the fund, especially in pension phase.

4. Costs and Fees

SMSF trustees need to carefully manage costs, as higher fees can erode the fund’s returns over time. SMSFs have a number of costs, including administration, auditing, accounting, and potential financial advice.

Key considerations:

• Investment Costs: If you invest in managed funds or ETFs, consider management fees. Direct investments, such as property, also have associated costs like stamp duty, insurance, and maintenance.
• Administration and Audit Fees: SMSFs are required to file an annual return and undergo an independent audit. These fees can add up, particularly for smaller funds.
• Advisory Fees: Many trustees seek financial, legal, or tax advice, which can improve outcomes but also add to the overall cost.

5. Compliance Obligations

Running an SMSF means adhering to strict compliance obligations set by the Australian Taxation Office (ATO). Trustees are legally responsible for ensuring the fund complies with superannuation laws, which include:

• Sole Purpose Test: The SMSF must be maintained for the sole purpose of providing retirement benefits to its members.
• Investment Restrictions: Certain investments are prohibited, including collectibles like artwork, personal use assets, and property leased to related parties (with some exceptions for commercial property).
• Borrowing Restrictions: SMSFs can borrow under limited recourse borrowing arrangements (LRBAs), but the rules are strict. Trustees must ensure borrowing arrangements are compliant and fit within the overall investment strategy.
• Record Keeping: Trustees must keep detailed records of investment decisions, including minutes of trustee meetings and annual financial reports. Failure to meet these requirements can lead to penalties from the ATO.

6. Borrowing (Limited Recourse Borrowing Arrangements)

While borrowing within an SMSF is restricted, trustees can use LRBAs to acquire assets like property. The loan is secured against the purchased asset, and other assets within the SMSF are protected if the loan defaults.

Considerations:

• Increased Risk: Borrowing amplifies both potential returns and losses. If property prices fall, the SMSF could end up owing more than the property is worth.
• Cash Flow: Loan repayments and property expenses need to be factored into the SMSF’s cash flow, ensuring there is sufficient liquidity to cover costs.
• Higher Costs: Borrowing through an SMSF involves additional setup fees and costs compared to purchasing property outright.

7. Insurance for SMSF Members

SMSF trustees must consider the insurance needs of fund members. While SMSFs aren’t required to hold insurance for members, it’s often recommended to provide life, total and permanent disability (TPD), and income protection cover.

Key considerations:

• Policy Type and Level: Ensure the policy is appropriate for the members’ personal circumstances and offers adequate coverage.
• Premium Costs: Insurance premiums are deducted from the SMSF, reducing the fund’s balance over time. Balancing coverage needs with affordability is essential.

Conclusion: Building a Balanced SMSF Portfolio

Investing through an SMSF offers flexibility and control, but it also comes with increased responsibility and complexity. To ensure a successful outcome, trustees must develop a clear investment strategy, diversify assets, and maintain compliance with regulatory requirements.

Seeking professional advice from a financial planner or SMSF specialist is often a prudent step, as they can help navigate the complexities of SMSF investments and ensure that your retirement savings grow in a tax-effective and compliant manner.