You can’t run a business in a SMSF, borrow money from a SMSF or have a holiday house in your SMSF. All these “grey area” investments are called in-house assets. In-house assets can make up only 5% of the total asset value of a Fund. So be careful not to breach the sole purpose test in a SMSF. The most important consideration in your SMSF is that all investments should be for retirement purposes only.

A SMSF is not permitted to run a business because it's usually considered a strong indicator that the Fund has breached the sole-purpose test. A SMSF must be administered for the sole purpose of providing retirement benefits for Fund Members. Any investment decision must be made to derive a future retirement benefit rather than a current benefit.

Holiday house

If your SMSF buys a rental property, whether it's residential or commercial, it is all legal and in order, provided the SMSF Trust Deed and SMSF Investment Strategy allows for this. The SMSF can even buy a holiday house and rent this out via an agent to the holiday market.

Deriving a personal use from this asset is a big NO NO. So if the Trustees stay in the holiday house, even in an off-peak period, the total asset can be classified as an in-house asset by the ATO. If the value of the holiday house is greater than 5% of the total assets in the SMSF (which is most likely the case) and its considered an in-house asset, the SMSF will loose the concessional tax treatment of 15% and be taxed at marginal tax rates of 46.5%. You don’t want this, so just don’t go there.

Carrying on a business of share trading
 

There is the question if trading shares is acceptable in a SMSF. The short answer is YES.

As a background, all the big retail superannuation funds trade shares. When investing in Superannuation, it is inevitable to buy and sell.

What level is acceptable might be the next question. There is no real guidance in this area apart from that trading should be supported by the Investment Strategy of your SMSF. When Superannaution Warehouse sets up a new SMSF, we provide you with a template of an Investment Strategy. Just makes sure as Trustees of the Self Managed Superannuation Fund that what you are planning to do, or trade, is noted in the Investment Strategy.

The question of whether a SMSF is a share trader or an investor is determined in each individual case. To consider if the SMSF is an active trader you should look at the intention of the trades, i.e. why the buys and sells were made. Factors to consider in court cases to establish if it is an active trader are as follows:
1. the nature of the activities, particularly whether they have the purpose of profit making
2. the repetition, volume and regularity of the activities, and the similarity to other businesses in your industry
3. the keeping of books of accounts and records of trading stock, business premises, licenses or qualifications, a registered business name and an Australian business number
4. the volume of the operations, and
5. the amount of capital employed.

Why is this important??

As Trustees you do not want to breach the sole purpose test (providing retirement benefits to members) as you might loose the concessional tax treatments for SMSF’s. 

Is share trading etc. "carrying on a business"?

The ATO also has concerns that some investment activities by SMSF Trustees — such as share trading and making certain 'tax effective' investments — may amount to carrying on a business. If those activities are carrying on 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:
• the sole purpose test: and
• investment rules generally.
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:
• develop an investment strategy and stick to it; and
• make and maintain investments on a commercial arm's length basis. This can be determined by asking whether a prudent person acting with due regard to his or her own commercial interests would have made such an investment.
Trustees must NOT:
• acquire assets from related parties (although there are certain exceptions); or
• lend to, or provide financial assistance to, other members of the SMSF or to their relatives.

Extreme example

A Trustee might have an investment strategy to play roulette and “invest” (gamble) in red or black. As long as its an investment strategy, the Trustee can go with it. It is legal. Although we do not condone this it illustrates the fact that a lot of freedom and responsibility is placed on the Trustee to act in the best interest of the SMSF.

Can a SMSF invest in a private company

  

A SMSF can invest in a private or public company, even if you work there. The criteria is not to have a controlling voting right. If you control the voting rights, the investment in the company will be regarded an in-house asset and this can't be more than 5% of your total SMSF assets.

See the ATO Tax Ruling 2009/4 on investments in companies that's considered related parties. Paragraph 157 in this ruling states that when you control 50% of a company, an investment in this company is regarded an in-house asset.

 

Conclusion

Yes, SMSF’s can trade shares providing they follow the investment strategies for the SMSF. The ATO has not determined when buying and selling shares is merely considered part of a normal investment strategy, or something more aligned to running a business as a trader.