Understanding SMSF Investment Strategy and Unlisted Investments
Many trustees of self-managed superannuation funds (SMSFs) are considering unlisted investments as a means of diversification and investment opportunity due to the current state of interest rates at all-time lows and share prices at all-time highs, in line with their SMSF investment strategy.
As with all SMSF investments, an unlisted investment would need to be permitted by the fund’s trust deed, in line with the fund’s investment strategy and meet the superannuation legislative requirements.
Here are five of the most asked questions on this topic
Question 1: I hold shares in an unlisted company that I think would be a significant investment to be held by my fund – can my SMSF purchase them from me?
No. This is because the superannuation legislation does not permit an SMSF to acquire an asset from a member unless it is an investment listed on a recognised stock exchange or business real estate property. As such, only shares listed on a stock exchange can be purchased from a member as an off-market transfer.
Question 2: Can my SMSF purchase an unlisted investment related to me?
Depends. The answer will depend on whether it is an investment in:
- A company – a related company is where a fund member or their Part 8 Associates controls the company either under the
– “Sufficient Influence” test; or
– if the member/associates, separately or as a group, have a majority voting interest (i.e. over 50%).
- A trust – a related trust is where a fund member or their Part 8 Associates controls the trust if
– The member/associates, separately or as a group, have a fixed entitlement to more than 50% trust income or capital;
– The member/associates influence the trustee/majority of trustees; or
– The member/associates have the power to remove the trustee.
Where an unlisted investment is deemed a related investment, it is an in-house asset (unless specifically exempted from the definition of an in-house asset), and if it exceeds 5% of the fund’s assets at any time of the year, the fund is in breach.
Question 3: Can my SMSF lend money to an unrelated trust or company?
Depends. If the loan is to an unrelated third party, it is possible; however, strict rules must be adhered to. For example:
- Is the loan permissible by the fund’s trust deed?
- Does the loan satisfy the fund’s sole purpose test?
- Is it part of the fund’s investment strategy?
- Is the loan at arm’s length, and are the terms commercial?
Question 4: The auditor is requesting proof the unlisted investment is at arm’s length and not an in-house asset – what documentation would I need to provide?
The fund auditor will require written evidence that the unlisted investment has been acquired at arm’s length and is not an in-house fund asset. This could include (but is not limited) to the following:
- Copies of the company’s constitution or the trust deed;
- ASIC company search to confirm the officeholders and shareholders of the company and any holding or subsidiary companies; and,
- The loan agreement.
Question 5: My administrator has asked for a market value as of 30 June, but as it’s an unlisted investment, how can I value it?
SMSFs must value their investments at their market value at the end of each financial year as part of their reporting obligations. As unlisted investments do not have a statutory requirement to prepare accounts on a market basis, this can cause difficulties when trying to attribute a market value to them. The auditor will need to see written evidence proving the unlisted investment’s market value.
Examples of this include:
- Copies of financial statements, including evidence the underlying assets are valued at market value;
- A share/unit price based on recent sales or purchases between unrelated parties; and,
- Written verification from a company director or trustee of the trust who is not a related party of the SMSF.
Unlisted investments in an SMSF give rise to their own set of specific ramifications. They are no insurmountable, though. As long as you adhere to the rules set out above, you can still access these investments. If you have any queries, don’t hesitate to contact us.
Kreston Stanley Williamson Team
*Correct as of 25 August 2021
*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek specific advice relating to your particular circumstances. Liability is limited by a scheme approved under professional standards legislation.