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I have a super fund whose only asset is a property. The property was last valued @ around $1.4 M. The rent produced rent of only $8750 or just over .6%. As auditors we are not meant to comment on the investment strategy of the fund, but in this case my concern is that the fund does not meet the single purpose test. Practically all the assets are this property generating a very small return, cash flow is bad if there is an emergency, and there does not seem to be any concern with generating more income
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Hi Andrew
In relation to the investment strategy the auditor signs off on regulation 4.09 of SIS that requires:
"Trustees must formulate, regularly review and give effect to an investment strategy for the fund".
The sole purpose is section 62 of SIS & that requires:
"The fund must be maintained for the sole purpose of providing benefits to any or all of the following: fund members upon their retirement, fund members upon reaching a prescribed age, the dependents of a fund member in the case of a member’s death before retirement".
If the Trustees have prepared an appropriate investment strategy only having 1 asset with low cash flow may not be a breach of the sole purpose test.
The members may have other assets personally and do not need a large cash flow being received by the Fund to pay pensions once they retire. If this was the situation this should be explained in the investment strategy.
In relation to the low rent I would be reviewing compliance with section 109 of SIS that rent is being received on an arm's length basis. You should also consider the NALI requirements and any financial assistance to a member / relative (section 65 of SIS).
The ATO provides guidance on what trustees need to be include in their investment strategy and they state:
"Your SMSF investment strategy should be in writing. It should also be tailored and specific to the relevant circumstances of your fund rather than a document which just repeats the words in the legislation.
Relevant circumstances may include (but are not limited to) personal circumstances of the members such as their age, employment status, and retirement needs, which influence your risk appetite. Your strategy should explain how your investments meet each member’s retirement objectives.
In particular, under the super laws your strategy must consider the following specific factors in regard to the whole circumstances of your fund:
risks involved in making, holding and realising, and the likely return from your fund’s investments regarding its objectives and cash flow requirements
composition of your fund’s investments including the extent to which they are diverse (such as investing in a range of assets and asset classes) and the risks of inadequate diversification
liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses such as the cost of managing the fund and income tax expenses)
fund’s ability to pay benefits (such as when members retire and require a lump sum payment or regular pension payments) and other costs it incurs
whether to hold insurance cover (such as life, permanent or temporary incapacity insurance) for each member of your SMSF."
The above is a good reference to compare to a Fund's investment strategy.
Thanks
SMSF AAA