Alternative investments in your SMSF
Let's be honest - these are crazy times in more ways than one.
For the purposes of this blog, lets consider that your superannuation balance has taken quite a downturn in value in the 'bread and butter' of the investment world.
That is - shares & managed funds are being written down in value. Interest rates in cash deposit accounts are appalling. Property valuations are quite high at the moment in most capital cities and the rent isn't guaranteed to be paid either.
If you have an SMSF (or are thinking of establishing an SMSF), you're probably in the best place to take advantage of alternative types of investments that you couldn't possibly own in your industry/retail super account.
Let's take a quick look at some of them, but before we do, let's consider these key points when it comes to all alternative investment type options;
Does your deed allow it? Make sure you check it out OR get advice.
Does your current investment strategy contemplate this choice? Should it be revamped as a result?
Will it provide you with cash liquidity when you need it? This one goes out to the pensioners of the world - but - the same applies to all other SMSF's because you'll need cash to pay for all your ongoing expenses and/or tax
If you want to take advantage of the low tax rate of an SMSF (or even nil tax rate), these investments always need to be in the name of the SMSF trustee. Not yours.
What's the exit plan? Is there a market to sell the investment when you want? Or are you locked in for a specified term?
Always ensure the asset is correctly held (that is, owned) by the trustee on the behalf of the SMSF.
Lastly, make sure you've done plenty of research before you decide to go ahead with any type of investment.
In my opinion only, I see this asset category benefiting the most from capital outflows out of the traditional investment world. Not that long ago you could be forgiven for thinking this is too wild for even a consideration.
Then again, some of the worlds largest companies are accepting payments in cryptocurrency (such as Microsoft, Ebay & Tesla) and even Government central banks are (or already have) coming up with their own typo of cryptocurrency. So it doesn't seem to be going away anywhere anytime soon.
Can an SMSF own cryptocurrency? In a word. Yes. But consider your deed and investment strategy as outlined above.
Can I transfer cryptocurrency to my personal account as part of my pension withdrawals? No. If you do this, they are instead counted as lump sum withdrawals.
I can understand why SMSF trustees would fall back on this option during uncertain economical times. After all, most would see this as the only true store of wealth.
Just make sure you understand whether your investing into bullion type assets OR is it in fact a collectable asset, such as medallions or rare gold coins. This can make an impact on the extra regulatory rules on your SMSF.
If it's deemed as a collectable type of asset, you will need to store them in a secure location (no, not in your own house!), and they will also need to be insured.
If you are investing into bullion, it's a good idea to trade via a reputable dealer such as Ainslie Bullion. Make sure you are setting up the account in the correct name of the SMSF trustee and that you use the SMSF bank account balance as the source of funds when you purchase the bullion.
As with any purchase, make sure you are keeping a copy of the invoice.
You will need to assist your accountant with a holding report each and every year as at 30 June so to ensure the asset is properly valued as at that date.
Fractional Property Investments
This can be a clever way to get a toehold into owning some property, without necessarily having the available cash balance to buy it outright in the name of the SMSF.
The upside is that your SMSF doesn't necessarily need to be set up (or pay) for a bare trust arrangement, that is, there is no required lending from a bank to purchase a property. You are using whatever cash available in the SMSF to make this purchase.
Though, the SMSF will not own the property outright in this fractional property investments model, it does mean that someone else is managing it for you and that will attract a fee for those services. So you end up paying fees in any case.
NDIS Property Investments
With the advent of the National Disability Insurance Scheme, it has brought about Government funding for housing people with a high need for custom built homes. However, it can't all be done by the Government and so the private sector needs to step in to fill the gap.
Possibly the greatest benefit to these type of investments (apart from helping those who need it most) is that a portion of the rent being paid to the landlord is supported by the Governments disability support payments the tenants are receiving. Also, these properties are typically in excellent locations that are in close proximity to services the tenants require for their care.
In my opinion only, one possible downside is that these highly specific, purpose-built homes are not likely to be sold easily (without significant renovations) or a new tenant found owing to an untimely event.
Loans made to unrelated parties
It is possible for an SMSF to loan money to unrelated parties. That is, to anyone other than your family and close business associates (partners/companies/trusts). Determining who is a related party is a subject matter all on it's own!
Given this is a risky type of arrangement, this would attract a higher rate of interest to charge to the borrower especially if it's an unsecured loan. But that is exact reason why the arrangement is created in the first place from the lenders point of view, that is, the attractive interest rate which is often higher than that what the banks can offer you for your cash holding.
It probably goes without saying, but the SMSF must have a written loan agreement in place setting out all the details of the lending arrangement. This will serve to protect your interests in the event of default, and after all, you are using the funds in your SMSF that will eventually become your retirement nest egg. So you want to make sure you get your money back.
Ok - well, that's a wrap for now.
If you're in a state of limbo and just need some extra guidance on the rules and regulations of these alternative asset classes, it's always better to ask the question upfront so to avoid any potential (and costly!) mistakes later on down the track.
The easiest way to create the time to have a conversation is to use our online meeting request found on the home page.