Futures in SMSF

I have read fairly widely about the use of derivatives in SMSFs, but I am still unsure of one aspect. My SMSF has a derivative risk statement and a suitable investment strategy and has used index equity futures (and options) to hedge stock positions at certain times. All good (including no problems with accountant and auditor). Now, I am interested in managing a separate portion of the SMSF funds in a strategy (self-directed) that uses commodity, financial and equity index futures to follow trends. The holding periods would be on the order of several days to many months. There would be appropriate risk controls, eg. stop loss orders, significant cash above margin requirements, daily monitoring and adjustments where necessary, etc. With an appropriate investment strategy and derivative risk statement, would this be permissible within an SMSF? I am unclear as to where the line is drawn wrt "carrying on a business", and I have seen some materials intimating that leverage within an SMSF is not allowed, although leverage and futures go hand in hand (unless fully collateralised, which kind of defeats the purpose).

I am also interested in whether this futures strategy could be undertaken within a unit trust that the SMSF owns units in, with further units owned by me personally, and/or a discretionary trust. There is no borrowing per se, so this should be exempt from the related party / in-house asset rule. Perhaps this part of my question is better posted in the accounting/legal, etc forum? This structure would allow a bigger set of funds to operate the strategy than just the SMSF or non-SMSF funds separately.

Thanks for any pointers,

Mark

 

Hi Mark,

There is nothing preventing a SMSF from 'running a business' per-se, however by doing so it may run afoul of other superannuation laws.

The questions you need to consider are:

• Is what you are doing specifically allowable under the trust deed? (if not then don't bother reading the rest!)
• Will your SMSF still met the sole purpose test? (i.e. providing benefits for the members retirement)
• Are the activities within the investment strategy for the SMSF?
• Are you complying with the SMSF borrowing provisions and not providing a charge over the assets of the fund?
• Is any financial assistance being provided to a member or a relative of a member?
• Are the investment dealings conducted on an arms-length basis?

In regards to your other question, you will not be able to utilise a unit trust to carry out your strategy because the investment by the SMSF into the unit trust would be considered an in-house asset.

For a SMSF to invest in a related unit trust (post 11 August 1999) the only allowable investments of the unit trust can be property which is not mortgaged or geared in anyway (residential or commercial) and cash.

The related unit trust cannot have an investment into another entity or other types of assets - either directly or indirectly (via derivatives).

Below is a flow chart in regards to a SMSF investing into a related unit trust and whether the investment would be considered an in-house asset or not:



I hope the above is helpful and answers your questions.

SM