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SMSF fundamental rules

Sole purpose

The sole purpose rule requires that a regulated superannuation fund operates for the sole purpose of providing benefits for members on their retirement.

It is important to ensure that the fund's investment arrangements do not provide financial assistance to another party who is not a fund member. It is also crucial that the fund is not running a business as part of its investment strategy.

A contravention of the sole purpose test is likely to arise if there is no retirement purpose behind the fund's investments. An example would be to provide benefits to members before retirement or to another person not a member of the superannuation fund.

The trustee of a self managed superannuation fund must ensure that they keep money and other assets of the superannuation fund separate from their own personal assets.

The trustee of a self managed superannuation fund must also ensure that no preserved benefits are paid before a condition of release is met.

Investment strategy in place

Self managed superannuation funds are required to have an investment strategy. The investment strategy should be documented. The trustees are required to prepare and implement the investment strategy.

The strategy must reflect the purpose and circumstances of the fund and take into account:

Trustees must make sure all investment decisions are made in accordance with the documented investment strategy of the fund.

Arms length investments

Investments by a self managed superannuation fund must be made and maintained on a strict commercial basis. This means that purchase and sale price of fund assets reflect a true market value for the asset and the income from assets held by the superannuation fund reflects a true market rate of return.

Investments on an arm's length basis are described in section 109 of the Superannuation Industry (Supervision) Act.

In-house asset rule

The trustee of a self managed superannuation fund is generally prohibited from acquiring assets from members and related persons.

'In-house asset' is a loan to, an investment in, or lease with, a member of related persons or associates.

There are exceptions to the prohibitions where the assets are acquired at market value and:

No borrowings

The trustees of a self managed superannuation fund must not borrow money, except in limited circumstances.

Generally, borrowings are allowed for a maximum of 90 days for the purpose of meeting benefit payments due to members or to meet a surcharge liability as long as the borrowing does not exceed 10 percent of the superannuation fund's total assets. Short-term borrowings are for a maximum of 7 days are permitted to cover the settlement of security transactions if the borrowing does not exceed 10 percent of the superannuation fund's total assets.

The trustee of the self managed superannuation fund must not give a charge over, or in relation to, an asset of the superannuation fund.