Generally, you’re not allowed to use your SMSF to run a business, borrow money, or acquire a holiday house. These “grey area” investments are referred to as in-house assets. In-house assets can make up only 5% of the total asset value of a Fund. Also be careful not to breach the SMSF sole purpose test. The most important consideration with an SMSF is that all investments are for retirement purposes only.
Running a business in a SMSF is generally considered a strong indicator that the Fund has breached the sole-purpose test. In a limited number of circumstances, you can run a business in an SMSF, but anyone thinking of doing so is strongly advised to have a thorough read of the ATO’s guidance here:
If your SMSF buys a rental property, whether it’s residential or commercial, it is legal and in order, provided the SMSF Trust Deed and SMSF Investment Strategy allows for this. The SMSF can even buy a holiday house as long as it is rented out through an agent on the holiday market.
Deriving personal benefit from this asset is a big NO-NO. If the Trustees stay in the holiday house, even off-season, the ATO will classify the total asset as in-house. And if the value of the holiday house is greater than 5% of the total assets in the SMSF (which it usually is), and is also considered an in-house asset, the SMSF will lose the concessional tax treatment of 15% and be taxed at the marginal tax rate of 46.5%.
To the question: Is it acceptable to trade shares in an SMSF? The short and simple answer is YES.
All the big retail superannuation funds trade shares. When investing in Superannuation, buying and selling shares and related investments is an activity Funds will enter into.
The question of the acceptable level of share trading is a little more difficult to answer. There’s no real guidance in this area apart from the fact that trading should be supported by your SMSF’s Investment Strategy. When Superannuation Warehouse sets up a new SMSF, we provide Trustees with an Investment Strategy template. As Trustees of the Self-managed Superannuation Fund, it’s up to you in your capacity as a Trustee to make sure that what you plan to do or trade is noted down in the Investment Strategy.
Whether an SMSF is an active share trader or a long term investor is determined case by case and depends on the intention of the trades, i.e. why the buys and sells are made. Factors that can be taken into account to establish the trading status of an SMSF are as follows:
Because, as Trustees, you don’t want to breach the sole purpose test (providing retirement benefits to members). If you do, you run the risk of losing the concessional tax treatment given to SMSFs.
The ATO is also concerned that the investment activities of some SMSF Trustees – such as share trading and making certain ‘tax effective’ investments – may amount to carrying on a business. If those activities do constitute a business, then – again – the SMSF may lose its complying status and the Trustee or SMSF may face penalties.
The ATO’s concerns outlined above reflect its regulatory imperatives in ensuring SMSF trustees comply with:
It is important that Trustees are aware of, and comply with, the investment rules set out in the SISA. The key things to remember are:
Trustees must NOT:
A Trustee might decide that playing roulette would make a good investment strategy, and “invest” in red or black. As long as it’s an investment strategy, the Trustee can go with it. It is legal. Now, although we would never agree with anything as extreme as this, it does illustrate just how much freedom and responsibility the Trustee is given when it comes to acting in the best interest of the SMSF.
Your SMSF can invest in a private or public company, even if you work there. The criterion is that you don’t have a controlling voting right. If you do, your investment will be regarded as an in-house asset, which can’t be more than 5% of your total SMSF assets.
See the ATO Tax Ruling 2009/4 on investments in companies that are considered related parties. Paragraph 157 of the ruling states that when you control 50% of a company, an investment in the company is regarded as an in-house asset.
If an SMSF invests into a related party unit trust that wants to buy real estate, develop it and sell it; or even buy it, develop it and lease it, this in the ATOs view can indeed be viewed and concluded as running a business within the SMSF. The Tax Office give further guidance in relation to this in the 2020 SMSF Regulators Bulletin.
Yes, SMSFs can trade shares, providing they follow the SMSF’s investment strategies. As yet, the ATO hasn’t made any pronouncements as to whether the buying and selling of shares constitutes part of a normal investment strategy, or something more aligned to running a business as a trader.
Running a business in an SMSF is generally considered a strong indicator that the Fund has breached the sole-purpose test. In a limited number of circumstances, you can run a business in an SMSF, but anyone thinking of doing so is strongly advised to have a thorough read of this page on the ATO website. An SMSF must be administered for the sole purpose of providing retirement benefits for Fund Members. Any investment decisions taken must be for the sole purpose of deriving a future retirement benefit and not a current benefit.