It Depends – Can an SMSF buy shares in a private company?

In this edition of It depends, senior associate Keeghan Silcock discusses whether an SMSF can buy shares in a private company.

Video Transcript

Hi. Welcome to another edition of It Depends. My name is Keeghan, and today I’ll be talking about whether your SMSF can buy shares in a private company.

Can an SMSF buy shares in a private company?

It depends. The first question you need to ask is whether the private company is a related party of the SMSF, its members, relatives and associates. If the private company is a related party, then the 5% in house asset limit applies. So, the value of those shares cannot exceed 5% of the total value of all of the fund’s assets.

Do the in-house asset rules apply?

The next question is if we’re able to get past that in house asset rule is, what is the reason for this investment in the private company? So, this goes to the sole purpose test and also the prohibition against financially assisting members of the fund.

Is the sole purpose test met?

The sole purpose of that investment in the private company needs to be for providing retirement benefits for the members and for no other purpose. So, it can’t be to allow pre-retirement benefits, members to access pre-retirement benefits from the fund. One thing we get concerned about is if we see that the member or their relative or a friend is involved in the business as an employee or a contractor. We need to be asking questions about whether that might be an ancillary purpose for the investment. Obviously, there’ll be other issues if the purpose is to financially assist that business or a friend or for some other reason.

Will investment comply with the NALI/NALE rules?

The next stumbling block often for investing in a private company is the non-arm’s length income and expense rules. That goes to again particularly where we see members are providing services to the private company. We need to be really careful and sure that those services are being provided on commercial market rate terms. Otherwise, we could run into some non-arm’s length income or expense issues for the fund. And there are some practical issues that we need to be really advising the members of the fund about if they’re looking to invest in a private company. So firstly, making sure that the trust deed for the SMSF permits the investment, and it’s also adequately provided for in the investment strategy for the fund, because that’s something that the ATO is really scrutinising at the moment.

The next is that each year the fund will be required to provide evidence of the market value of those shares. And that can be a bit tricky to do where it’s investment in a private company. It’ll be important that the members have adequate access to the financial statements of the company, and they’re able to get some evidence about the market value. And that’s a lot trickier to do than an appraisal of a real property, for example.

If you’d like some advice about a particular proposed investment in a private company or any of these issues I’ve spoken about, please feel free to contact a member of our team.