Private companies subjected to intense scrutiny, SMSFs warned
SMSF clients should be cautious about investments in private companies where there is an operational entity as there is increased risk, says an SMSF lawyer.
Speaking at a recent Tax Institute conference, DBA Lawyers director Daniel Butler said there has recently been a bit of a trend with SMSF investors acquiring shares in private companies for their fund.
SMSFs making these sorts of investments need to be careful, he said, as it means there will be a lot of scrutiny on what’s happening in that company.
“I really encourage you to read TR 2006/7 because whatever happens in that company is really important,” said Mr Butler.
“You need to look at a whole array of factors set out under section 295-550(3) [of the Income Assessment Act]. For example, what was the purchase price, what was the dividend? Is there any discretion?”
Mr Butler said SMSFs will need to have everything supported including benchmark evidence on remuneration and benchmark evidence on any loans and borrowings.
“I would not encourage any of your clients down that path of private companies in the instance of running a business unless they’re willing to face that kind of risk or scrutiny,” he warned.
SMSFs will also need to consider whether they are controlling the company, he added.
“Is there sufficient influence [over that company] and that doesn’t necessarily need to be more than 50 per cent. Is it an in house asset?” he questioned.
You also need to think about other risks such as sole purpose and non-arm’s length income, he said.
“So be very careful with private company investments and that you’re comfortable with what’s in TR 2006/7,” he warned.
“Make sure whatever is happening in that company is well supported.”
Miranda Brownlee
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.
