Peter Johnson, founder of Advisers Digest, said a trading account can go into a negative balance but not to the point where the fund is borrowing.
Johnson gave an example of an SMSF that appears to have a negative balance in its Saxo trading option account showing as a liability account in the fund’s year-end books.
The accountant has indicated to the fund member that as the Saxo option trading account is a derivative investment it can have a negative balance, and this negative balance in the derivative instrument does not render a breach of the Superannuation Industry (Supervision) Act under section 67.
“They can go into a negative balance … Think of it like this. What does your income tax account look like at the end of the year? You now owe tax. You’re now in a negative account balance. You have a loan from the Tax Office, which is a breach of the SIS Act. So, a trade creditor is not a borrowing. At some stage, it will turn into a borrowing, and usually the Tax Office says that’s at 12 months,” Johnson said.
He continued that if the fund doesn’t pay the accounting fees for more than 12 months, it is then borrowing from the member and is a breach, but while it’s simply a trade creditor, it is not.
However, he said that if a fund does have derivative investments, it needs a separate investment strategy for that derivative investment.
Johnson, however, also warned about the dangers of investing in trading accounts as a strategy, stating that particularly in Capital Market Days (CMDs), “for every dollar made, there’s a dollar lost”.
“In fact, in all options, when you think about it, for every dollar made, there is a dollar lost. If you lose your money, the party that you would have exercised it against makes some money, but with CMDs, you’re playing with it as you go along,” he said.
“There’s two sides. A company might sell you options to then go buy shares off the company later on, but that’s the company. Here, you’re both gambling. You’re both saying ‘I’m having a bet’, but the person you’re betting against is a highly paid professional who’s charged you $5,000 to learn how to bet against them. You’ve got no hope of winning, because it’s a net zero, some gain, less whatever they charge in fees.”
