How to Include ASX Shares in Your SMSF Investment Strategy

For SMSF trustees, investing in ASX-listed shares can be a part of the fund’s investment approach. However, choosing the shares is just one step. As laid out by the Australian Taxation Office (ATO), It is important for the SMSF trustees to create and follow an investment strategy. This strategy should match the fund’s purpose and situation, and the retirement goals of its members.

So, how might ASX shares fit into an SMSF investment strategy?

Start With a Written Investment Strategy

Before an SMSF starts investing, the people who are, in charge must have an investment strategy. The strategy must explain the fund’s investment goals and the kinds of investments the fund is allowed to make.

The strategy must be tailored for the particular SMSF instead of only repeating superannuation legislation. The strategy should explain how the fund’s investments are designed to meet the members’ retirement objectives.

Consider Where ASX Shares Fit

The ATO identifies shares and other securities listed on the ASX as examples of listed securities. Shares listed on the ASX can be included in an SMSF investment plan, but must comply with superannuation rules and fits fund’s investment strategy.

When looking to invest in ASX shares, trustees need to treat the investment as part of the SMSF’s overall portfolio and objectives.

Consider Risk, Return and Liquidity

An investment strategy must consider the risks and returns that come with making, holding and realising investments relation to the fund’s objectives and cash‑flow needs.

Another important consideration here is liquidity. Trustees must consider how quickly fund assets can be turned into cash to cover expenses and benefit payments. The investment strategy must also examine how the fund will service benefits payments when members retire.

So trustees should think about ASX shares in light of the SMSF’s cash‑flow needs and the circumstances of its members.

Keep Ownership Clear and Follow the Rules

ATO guidance states that SMSF investments need to have clear legal ownership by the fund. These investments must be made in a way that's fair and not influenced by personal relationships. The SMSF’s accounts and transactions need to reflect the real value of the investment in the market, and must also pass the sole purpose test. This implied that the fund exists to give retirement benefits to its members or death benefits to the beneficiaries of any deceased member.

There are also certain restrictions around the transactions with the related parties. Listed securities can be acquired from a related party, in specific circumstances where the securities can be acquired at market value.  

The Bottom Line

Including ASX shares in an SMSF investment strategy requires more consideration than simply picking listed companies. Trustees must think about how those ASX shares fit the fund’s objectives, how those ASX shares provide diversification, how those ASX shares affect risk and return considerations, how those ASX shares meet liquidity requirements and how those ASX shares match the circumstances of each member. 

The key is to ensure that investment decisions are consistent with the SMSF’s written strategy and the requirements outlined by the ATO.

(Source: Australian Taxation Office (ATO) - www.ato.gov.au)