Can my superannuation fund actually invest in physical assets?

By saying the word super, most of us imagine an organized pot of money that will be growing in a managed fund thus will be able to sustain a good retirement. But there is a rising interest--perhaps with the more materialistic element of wealth--that super might stretch its arms into the world of real property: of houses, precious metals, fine art, even a piece of land somewhere in a far off part of the world.

Supposing you have ever asked yourself whether or not the safety net beneath your back-up battery will sustain in safety a gold bar, or a vineyard, or a piece of custom-made jewelry, you are not alone. This posting will take you through the opportunities, the traps, and the actual actions you can undertake to pursue this fascinating possibility without violating the regulatory regime of your super.

The Regulatory Framework of Super.

The superannuation scheme in Australia is regulated by a series of rules, which tries to identify how best your money is not subjected to unnecessary risk as well as in a manner that will ensure the optimality of increase in the contributions. The Australian taxation office (ATO) and the Australian securities and investments commission (ASIC) lay down what is acceptable, and these rules are not about how you invest but rather what is out there to be done in managing the investment.

Super can hold physical assets only on condition that:

1. The investment is allowable - The type of asset should be listed on a list of permitted investments or it should qualify under the high-risk or asset type exemptions which the ATO permits in some limited situations.
2. The vehicle used is compliant - There are a number of super funds that adopt a self-managed super fund (SMSF) structure as direct ownership due to its ability to be the most flexible when it comes to holding physical assets.
3. The investment strategy aligns -  Before you can purchase a gold bar, the strategy document of the fund has to indicate that the asset is one of the long-term goals of the fund.

When you are working at a retail super, the fund manager will normally determine what is to be purchased. In case you desire greater freedom, establishing an SMSF is a popular path. It is an additional burden of a responsibility, but it also provides you with the legal structure to possess physical gold, real estate, or other physical assets.

Gold: The Physical Quick-start Asset.

Gold has been a favourite of the investors who seek physical stores of value. It is easy to liquidate, not new in the market, and able to hedge against the value of the currency.

Why gold?

• Liquidity: A gold bar is easily traded in a few hours, unlike a piece of land, which may even take months to sell.
• Security: Gold vaults are very secure and you can also have a custodial service which insures the metal.
• Transparency: The cost of gold will be publicly traded on larger markets and thus no secret price.

To invest gold in your super, you will require a custodial arrangement that could store your bars in a custodial storage that is accepted by the ATO. The audit trail and insurance of the custodian is an essential element of compliance and makes sure that the records of your super are consistent with the actual metal you have at his location.

Real Estate: The Physical Point of reference.

The other classic physical asset that can give a rich touch to the portfolio of your super is real estate. Rental houses can bring in a consistent income; commercial houses can have better returns; and a small piece of land in an up and coming area can be worth quite a lot in the future.

Property valuation, zoning laws, tenant agreements, maintenance, and vacancy potential are more complicated due diligence factors involved in real estate than in gold. In the case of super, the inclusion of the property into the investment strategy should be well explained with expected returns and expected risk management plans.

In the event the property is not owned directly, but is held as a managed portfolio (e.g. a real estate investment trust -REIT), you may be able to hold it in a super account, without owning the actual building. Yet, REITs remain not tangible, but financial assets, and thus are not subject to the same compliance regulations.

The Physicality of owning real gold.

There are a number of practicalities that come into play after you make a decision that gold is the right asset to your super. You will have to find reliable dealers, ensure the validity of the bars, determine a place in the vault, and insure.

In most cases, a super fund shall collaborate with a custodial service which will provide the products of vaulted gold. These services place the gold in a safe vault and issue you with a certificate of ownership which is registered in the official super ledger. Since the off-site storage of the gold happens, you do not need to spend time transporting and storing the gold, however, you pay to have it stored and insured.

Investing in gold will mean you are purchasing a portion of the market, so in case the price of gold changes so will the price of your super investment. That is, you will have to keep an eye on the gold market and change your strategy based on it. Depending on how much it is going to drop, you can choose to buy or wait for the rally if you have a high risk appetite.

Tax and Legal

Superannuation is a vehicle that benefits tax wise, and does not benefit all forms of investment. Some of the physical assets are considered by the ATO as non-super investments in case they do not qualify as a super-eligible investment.

Key points to remember:

• Capital Gains Tax (CGT): Gains on physical assets will be liable to CGT. Nevertheless, super does not pay CGT on assets that have been held over 12 months as long as it is a legitimate investment.
• Income Tax: Rental income of a property held in super is charged with 15%- a lower rate as compared to ordinary income.
• Insurance and Fees: Custodial Costs, Insurance premiums and administration fees are deductible to the income of the super.

Due to the sensitivity of the rules, it is prudent to seek professional consultation as a way of making sure that every investment is within the bounds of the rules and is tax-effective.

Getting the Right Advice

In case you are keen on incorporating physical assets to your super, you will need to speak to professionals who know the investment as well as the regulatory environment. This is the point where the Brisbane financial planners come in.

An experienced financial planner would assist you:

• Evaluate your existing super strategy and determine where physical assets can be accommodated.
• Prepare an investment plan that complies with the requirements of the ATO.
• Find the right custodians of gold or real estate.
• Project tax consequences and savings.

It is almost certain that a planner specializing in super investments and, hopefully, having experience with physical assets would be the difference between a successful transition and an expensive mistake.

The Bottom Line

Yes, your superannuation fund may invest in real assets, however, it is important to have a clear grasp on the regulatory framework, well-written investment strategy, and appropriate custodial and professional support. With or without the allure of gold bars, or the prospect of renting a house, the appeal of adding something to touch and feel to your retirement can give contentment both emotionally and financially.

When you are willing to venture into physical assets, where you do not know how to start, you may want to seek the services of an expert such as the ones of a financial planner such as the Brisbane financial planners. Their knowledge can assist you in the complexities, and your super will not only develop, but safely and within the compliance.