Is your Self Managed Super Fund liquid enough?
There has been strong growth in real property investment by self managed super funds (SMSF’s). Many funds hold such property as their only substantial asset – a position which has the potential to cause material difficulty should a benefit payment or rollover to another fund suddenly be required, such as upon an irreconcilable family breakdown (divorce), sudden death or major disability of a member.
For trustees of SMSFs, managing your own fund and getting it right is very important. There are many rules and regulations in the various laws that govern super that are designed to protect your retirement income. As a trustee, you need to adhere to the rules and know that you are ultimately responsible for the running of the fund, even if you use tax, financial and super professionals to help to manage it.
Statistics regarding death and illness are often quoted when advisers tell clients about the need to establish life, TPD, trauma or other risk cover. These same statistics can be quoted in support of the need to maintain liquidity in a SMSF. As with risk cover, the purpose of liquidity is to be prepared for the unexpected, such as death or sudden illness, rather than death in accordance with current actuarial life expectancy table.
Life is uncertain, and SMSF Trustees need to be prepared for the unexpected by retaining a reasonable portion of SMSF assets in liquid assets.
In their publication “Running a self-managed super fund”, the ATO states that trustees are required to prepare and implement an investment strategy for their fund, and regularly review it. The strategy needs to reflect the purpose and circumstances of the fund and consider:
- appropriate diversification and the benefits of investing across a number of asset classes in a long term investment strategy;
- the ability of the fund to pay benefits as members retire;
- the needs of members eg their age and retirement needs.
Further, the guide states that trustees ‘must ensure the level of investment in business real property still meets the investment strategy of the fund, including diversification of assets, liquidity and maximisation of member returns in the fund. A fund with 100% investment of assets in business real property could struggle to meet these requirements’.
SMSF advisers and trustees need to plan for all life’s events and also consider lega requirements in formulating investment strategies; including the untimely death or disability of a member, or the possibility that a member may exit from the SMSF unexpectedly and require a benefit payment to be made in cash or rolled to another fund. A sufficient level of liquid assets should be provided for in the SMSF to cater for these contingencies.
The ATo has long been saying to SMSf trustees and auditors that it is most important for an SMSf to have a suitable investment strategy and for the funds investments to be maintained according to that strategy. This year the ATO has again announced there will be a greater number of SMSF audits. If ATO auditors determine that the investment strategies of SMSF’s are not aligned with the needs of the members, some SMSF’s may suffer financially, even possibly to the extent of having their favourable tax concessions withdrawn.
So in your own personal review of your own financial strategies, and especially if you are a trustee of a SMSF, you need to ask: Am I liquid enough?
Where to from here?
- Contact us
- Get more information about an Educational Forum for you and your friends
- Register and receive regular email updates
Dan Smith is a self employed Financial Planner based in Rockhampton. He has clients in various locations throughout Australia but predominately in Central Queensland and specifically the geographic area encompassed by the Rockhampton Regional Council.