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Investing on arm’s length

Running a self-managed super fund requires trustees to adhere to complex laws and follow a number of onerous rules.

One of the most fundamental investment rules for SMSFs is that the trustees must transact on an arm’s length basis to ensure no conflict of interest arises. An arm’s length transaction requires trustees to conduct on a commercial basis as if there was no relationship between the parties.

This means the purchase and sale price of fund assets should always reflect the true market value of the asset, and the income from the assets held by the fund should always reflect the true market rate of return.

SMSF trustees must obtain independent valuations for assets which are not listed on a public market. Furthermore, if a SMSF sells an asset to a related party or member of the fund, the sale price must be at market value.

Any non-arm’s length income is taxed at the highest marginal tax rate. The ATO considers non-arm’s length income as income which is derived from a scheme in which the parties were not dealing with each other at arm’s length and if it is more than the SMSF might have been expected to derive (if the parties had been dealing on a arm’s length basis).

Posted on 23 March '17 by , under Super.

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Superfund categories and what they mean

There are four different categories of super funds. These have different primary features and are more applicable to certain people than they are to others.

Retail super funds

Anyone can join retail funds. They are mostly run by banks and investment companies:

  • Allow for a wide range of investment options.
  • Financial advisors may recommend this type of fund as they receive commissions or might get paid fees for them.
  • Although they usually range from medium to high cost, there may be low-cost alternatives.
  • The companies that own these funds will aim to keep some of the profit they yield

Industry super funds

Anyone can join bigger industry funds, but smaller ones may only be open to people in certain industries i.e. health.

  • Most are accumulation funds but some older ones may have defined benefit members
  • Range from low to medium cost
  • Not-for-profit, so all profits are put back into the fund

Public sector super funds

Only available for government employees

  • Employers contribute more than the 9.5% minimum
  • Modest range of investment choices
  • Newer members are usually in an accumulation fund, but many of the long-term members have defined benefits
  • Low fees
  • Profits are put back into the fund

Corporate super funds

Arranged by employers for employees. Large companies may operate corporate funds under the board of trustees. Some corporate funds are operated by retail or industry funds, but availability is restricted to employees

  • If managed by bigger fund, wide range of investment options
  • Older funds have defined benefits, but most are accumulation funds
  • Low to medium costs for large employers, could be high cost for small employers

Self-managed super funds

Private super fund you manage yourself. Many more nuances to this type of fund. Most prominent feature is the autonomy over investment.

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