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Self Managed Superannuation Funds: What are the Restrictions?

What are the Restrictions?

Considerations Background and Explanation
1. Membership Restrictions The law requires an SMSF to have less than five members and that all members must be trustees or directors of a corporate trustee. No member of the fund can be an employee of another member of the fund unless the members concerned are relatives. An arms length employee of a company, which contributes to the SMSF (in respect of its controllers), cannot be a member of the same fund as the controllers of the company.
2. Investment Restrictions Existing legislation requires that all financial transactions occur as they would if they were being conducted at arms length. The appropriateness of SMSF investments is now a key area of regulation, and the investments of a SMSF must consider the needs of the Fund’s members and their Risk Profile. Legislation has been passed to prevent people from putting inappropriate investments into their SMSF to avoid paying their marginal tax on investment earnings. Inappropriate investments may include purchase of equipment for leasing back to the business, for example, a dentist leasing dental chairs and equipment from an SMSF would in our opinion not be providing for retirement benefits.
2.1 Related Parties and Relatives Your SMSF must invest for the sole purpose of providing for your retirement. Exiting investment rules meant that the fund is unable to: 

  • Make loans or give financial assistance to members or relatives
  • Acquire assets from related parties
  • Borrowing by the fund and providing finance to a related employer
2.2 In-House Assets Government legislation limits Super funds from having more than five per cent of the market value of the funds invested in ‘in-house’ assets. The major exception is where a fund acquires premises used for business purposes. This may mean that an SMSF may invest in commercial, industrial or retail property. ‘In-house’ includes: 

  • Investments in related parties, including geared private unit trusts; and/or
  • Investment in related parties, for example, leasing a holiday house back to members of the Super fund.

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