Keeghan Silcock, senior associate at Cooper Grace Ward Lawyers, said an SMSF can buy shares in a private company but the investment must meet the regulatory requirements.
“One of the main stumbling blocks when investing in a private company is the non-arm’s length income and expense rules particularly where we see members providing services to the private company,” Silcock said.
“You need to be really careful and sure that services are being provided on commercial market rate terms. Otherwise, you could run into some non-arm’s length income or expense issues for the fund.”
She said there are also other practical issues about which fund members need to be advised if they are considering investing in a private company.
“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 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. That can be tricky to do when it’s an investment in a private company. It’ll be important that the members have adequate access to the financial statements of the company and can get some evidence about market value. And that’s a lot trickier than an appraisal of a real property, for example.”
Silcock said before investing in a private company one of the first questions that need to be asked is whether the private company is a related party of the SMSF, its members, relatives or associates.
“If the private company is a related party, then the 5 per cent in-house asset limit applies. So, the value of those shares cannot exceed 5 per cent of the total value of all of the fund’s assets,” she said.
If the potential investment passes the in-house asset rule, fund members must consider the reason for investment in the private company.
“This goes to the sole purpose test and also the prohibition against financially assisting members of the fund,” Silcock said.
“The sole purpose of that investment in the private company needs to be to provide retirement benefits for the members and no other purpose. So, it can’t be to allow members to access pre-retirement benefits from the fund.”
One concern that often arises around this issue is if the member, 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,” Silcock said.
“There’ll be other issues if the purpose is to financially assist that business or a friend or for some other reason.”
