SMSFs are entering a new era of popularity, in 2025, SMSF membership grew by 5%, the highest growth rate in 12 years.
A big part of their allure is an enticing mix of greater investment control and flexibility.
There’s no doubt it’s an appetising concoction, but as a wealth manager and financial advisor, I feel it necessary to say that these commonly cited reasons why are not reason enough to establish an SMSF.
An SMSF should be established to serve a specific strategic purpose. Simply having access to common investments falls short of satisfying that criteria.
Take shares, for example. A common reason people consider an SMSF is the ability to invest in shares. However, many retail and industry super funds now provide access to a wide range of listed investments, allowing you to build and manage your own portfolio of selected shares within superannuation.
If I see clients that don’t have unlisted or very particular assets, or a very particular investment strategy that incorporates things like precious metals, direct property or even crypto, something that you can’t get in those retail funds, the question is: Why do you have a self-managed super fund?
There can be a lot of burden in maintaining an SMSF. It’s an ongoing responsibility with ongoing costs. If you’re purely using an SMSF as a means to invest in shares through your super, it’s highly unlikely you’re getting value for cost. The idiom of using a sledgehammer to crack a nut applies here.
That’s not to say SMSFs don’t offer genuine merits and opportunities. In the right circumstances, they can provide access to investments and strategies that may not be available through a retail or industry fund.
But greater choice does not automatically lead to better outcomes. The real value lies in selecting investments that support your fund’s strategy, suit your circumstances, and genuinely contribute to your retirement goals.
SMSFs come with a smorgasbord of investment options. But just because it’s on the table doesn’t mean it needs to be on your plate.
So, what should you consider before your SMSF invests?
1. Get clear on the purpose of the investment
Trustees must never lose sight of the fact that any investment through an SMSF must genuinely be made for retirement purposes. This is not a helpful word of advice or best practice procedure; it’s law, the sole purpose test has its very own section under the Superannuation Industry (Supervision) Act 1993.
Any investment needs to satisfy this test, which is essentially a set of conditions that need to be met in order to demonstrate that the SMSF exists for the sole purpose of providing retirement benefits.
Satisfying these conditions is your licence to operate, yet it’s not unheard of for trustees to lose sight of the bigger picture and find themselves flouting these stipulations.
The situations we most often see falling short of the sole purpose test and landing trustees in hot water involve investments in property, in the trustee’s own business, or the business of someone the trustee knows.
The wrong reason to invest in property
The ability to invest in property is one of the main drawcards of an SMSF. It’s also one of the areas that many people experience as murky through the lens of sole purpose.
For instance, let’s say an SMSF trustee plans to purchase a property, rent that property out for ten years, and then retire into it. While the property is for your future retirement, it’s not for the purpose of providing you with income in retirement. Rather, you’re essentially just choosing to purchase the property through your SMSF because that’s where the money is.
In this scenario, the motivator behind the investment isn’t for the sole purpose of providing retirement benefits, which makes it a fail on the sole purpose test.
The wrong reason to invest in your business
It’s not uncommon for business owners to use their SMSF’s broader investment capabilities to make investments in their own companies.
Now, there are a lot of rules in relation to investing in private companies and businesses, but even if we were to put those to the side for the sake of argument, the immovable question still remains: Is this investment for the sole purpose of your retirement?
If you were to set up an SMSF for the primary purpose of investing in your own business, in the vast majority of cases, this is not going to satisfy the conditions of sole purpose.
The wrong reason to invest in the business of someone you know
Investing in a private business may look like a promising opportunity. But where the business is being operated by a friend, family member, or other connection, trustees need to consider whether they are genuinely acting in the interests of the fund.
If the underlying purpose is to provide financial support to the person or their business, rather than build retirement benefits, then the investment may breach the sole purpose test.
2. Consider what the investment adds to the fund’s bigger picture
Before you bring a new investment into the mix, trustees need to properly review their documented investment strategy and critically analyse what a potential newcomer is going to bring to the table.
Under Australian superannuation law, your SMSF investment strategy must explicitly prove that you have considered liquidity, diversification, risk and return objectives, and liabilities. Failure to do so can result in penalty, though fear of ramifications for non-compliance should not be the deciding factor in your decision to maintain a clear and well-documented investment strategy.
Think of it less like compliance box-checking and more as a measure to protect yourself and your future. For every potential investment you’re circling, ask:
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Does it improve diversification?
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Does it provide income?
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Does it leave the fund with enough liquidity?
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How does it fit alongside the fund’s other assets?
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What happens to the cash it generates?
Taking the time to really drill into these questions, ideally with the support of a trusted advisor, will help you ascertain whether this is the right place for you to be putting your money right now.
3. Ask whether this investment is positively contributing to the fund’s diversification
In the same way that diversity is an essential ingredient in any thriving ecosystem, it plays a key role in supporting the health and sustainability of your SMSF investment strategy.
When the topic of asset diversification comes up, risk minimisation is usually the leading rationale. Preventing all your capital from being tied to a single asset class and having the ability to offset one asset’s poor performance with the gains of another, is one of the most powerful ways to preserve your fund’s overall value.
We see it all too often: SMSFs with significant asset concentration and trustees who do not realise how vulnerable this can leave their fund.
It’s not uncommon for us to see scenarios where one property makes up 90% of the fund. There have even been cases where an SMSF holds one major shareholding.
This level of concentration leaves the fund heavily exposed to the performance of a single investment. It can also limit the fund’s options if circumstances change, particularly when the dominant asset, such as a family farm, cannot be easily sold or divided.
4. Think beyond growth, to liquidity and income
Diversification is not only about balancing risk. You also need to consider whether the fund’s investments can generate or provide access to the cash it will need.
Liquidity and the capacity to generate income are important at every stage, but especially when you’re nearing retirement.
I see serious problems with people who are moving into the retirement phase of life and are adamant about investing in assets that won’t produce regular income.
For example, let’s say you’re in your late 50s and want to establish an SMSF to invest in cryptocurrency. That investment is not going to generate income for the fund, so you may end up needing to sell some or all of it to meet your pension payments and fund your retirement.
Every investment needs to earn its keep
An SMSF can give you access to investment opportunities that may not be available through a retail or industry fund. But that flexibility is only valuable when it’s exercised with purpose.
Before making any investment decision, get back to the fundamentals. Why does it belong in the fund? What does it add? How will it affect diversification, liquidity, and income? And, most importantly, how will it directly benefit you or the fund’s other members in retirement?
The fact that an investment class is available to you does not mean it is right for you. Every asset must earn its keep within the fund’s broader investment strategy.
If you are considering making a new investment through your SMSF or questioning whether your existing investments are still working together as they should, get in touch with me or the Ulton Wealth team.
