Typical Investments

The SMSF Institute - Typical SMSF Investments

One of the main advantages to running your own SMSF is the ability to choose from an almost unlimited range of investments to help fund your retirement.

 

One of the main advantages to running your own SMSF is the ability to choose from an almost unlimited range of investments to help fund your retirement. As a result, in addition to property investments, there are a number of other types of investment commonly held by SMSFs. The decision on which asset mix an SMSF invests in will be based on a tailor-made investment strategy that is designed specifically for your fund.

While an SMSF must have an investment strategy, this investment strategy is one that you – as the fund trustee – are free to design in a way that best suits the needs of your fund. And, because there are no superannuation rules that specifically prohibit your SMSF from investing in a particular asset class, the menu of investment options for your SMSF is virtually unlimited. Further, unlike other types of superannuation funds, you get to choose whether your fund invests into these assets directly, via professional managers, or through a combination of both.

The more common types of investments seen within SMSFs include:

Listed Shares

You can gain access to share investments for your SMSF in a number of ways depending on the costs, level of risk, and amount of professional intervention that you are prepared to take on board. They can be purchase directly through the stock exchange or via other mechanisms including:

When developing a well-diversified investment portfolio for your SMSF, international shares can also be included in your SMSFs investment mix. This too, can be done directly or via professionally managed funds through similar mechanisms to those listed above.

Holding Australian company shares inside an SMSF can also be quite attractive from a tax perspective – particularly where the shares held are in companies that pay fully franked dividends.

In short, a dividend is a payment made to a shareholder and represents a share of the company's after-tax profits.

As the company has already paid tax on this profit, a tax credit (referred to as a franking credit) is often attached to dividends to ensure that the same company profit is not taxed twice.
In short, a dividend is a payment made to a shareholder and represents a share of the company's after-tax profits.

As the company has already paid tax on this profit, a tax credit (referred to as a franking credit) is often attached to dividends to ensure that the same company profit is not taxed twice.

As such, a 30% franking credit received by your SMSF will reduce or eliminate your fund's overall tax liability and improve the return from this investment.

Let's take a look at an example where we assume that your SMSF receives $700 in cash dividends while in the accumulation phase:

 
For tax purposes:
Your fund receives:
Dividend: $700 $700 cash
Franking credit: $300
SMSF Taxable Income: $1,000
Less: Tax (SMSF tax rate 15%) ($150)  
Plus: Refund of Franking Credits from ATO $300  
Tax Refund:   $150

So, in addition to the $700 in cash dividends that your SMSF receives, the fund will also receive an extra $150 as a tax refund from the tax office.
Importantly, when you start to draw a pension from your SMSF, the fund's assets are transferred into the pension phase. Despite the 0% fund tax rate that applies in the pension phase, the franking credits are still available and are refunded to the SMSF – effectively resulting in an increased return from the amount invested.

Private companies or private trust investments

An SMSF can also invest in a private company or private trust. However, investing through these types of arrangements carries higher levels of complexity.

For instance, care needs to be taken to ensure that the private company or trust is not considered to be a related company or trust. Such entities will typically be considered to be related to your SMSF if you and/or your associates control the company or trust. Once a company or trust is related, it will generally be referred to as an in house asset of the fund – and as a result, the funds ability to invest into it will be limited to 5% of the fund's assets.

However, in circumstances where the company or trust is not related, this 5% restriction will not apply. Similarly, there are special types of companies and trusts that, although related, will not be considered to be in house assets as long as specific rules are followed. As such, by investing through these private entities, your SMSF can access a broader range of investment opportunities.

For example, an investment by your SMSF into a private trust may provide an opportunity for your fund to indirectly conduct a property development project jointly with you, your business, or other like-minded developers or investors.

Cash and fixed interest

It is a necessity for an SMSF to have a working cash account to manage the day-to-day transactions that take place when running an SMSF. For example, a cash account is crucial in order for the fund to collect rent, pay expenses, receive interest and dividends, pay pensions and to accept contributions.

As the fund trustee, you have a choice in the type of account that your fund uses for this purpose. While an SMSF can simply use an everyday style transaction account, quite often, a cash management account or a cash management trust is used in order to provide your SMSF with a higher interest rate while still allowing regular transactions.

Depending on your chosen investment strategy, for additional cash holdings, in order to balance out an SMSFs investment portfolio, seek a higher income return, or to provide some added level of investment security, you can also add a term deposit of your choice – from the institution of your choice.