Pertinent Points for Private Shares
  • It's entirely possible - you just need to allow for it in the trust deed and investment strategy, and ensure investments are done 'at arm's length' and for the sole purpose of benefiting members in retirement.
  • 'In-house' assets e.g. if you invest in a family member's company, must be no more than 5% of total SMSF assets.
  • Failure to comply with several key areas relating to private shares and in-house assets could result in up to 60 penalty units from the Australian Tax Office, with each unit costing $275.
  • 'Not at arm's length income' or NALI might also be taxed at 45%.
  • Speak to a financial adviser before embarking on this journey.

Shares from publicly-listed companies are among the most popular and simple asset classes to invest with your self-managed super fund (SMSF). Of the $845 billion-odd of assets held collectively by Australian SMSFs, $245 billion is with listed shares. But what if you wanted to invest in a private company?

The value of unlisted shares held in Aussie SMSFs totals nearly $12 billion, so evidently people are doing it. Whether ‘private’ means a big company such as Gina Rinehart’s Hancock Prospecting, a start-up’s funding round, a local hairdresser, or something in-between, it’s entirely possible.

However when investing in a private company you could run into three main areas of strife: failure to adhere to in-house assets rules, lending to members and relatives, and failure to notify of significant adverse events (e.g. your share price tanks). Each of these areas could result in up to 60 penalty units from the ATO - costing $275 a pop. Ouch!

This means you need to make sure everything is satisfactory in the eyes of general SMSF practices and taxation law. Yawn! Luckily there are several ways to do it.

What to consider when investing in private companies through your SMSF

Investing in a private company is possible - really, anything is with an SMSF - provided you consider these four key aspects.

At arm’s length test

One of the key areas you will need to consider is the ‘at arm’s length' test, which means the investments must be done at market rates and fair value. No ‘jobs for the boys’ here. Areas that could trip you up include:

  • A related party’s business: It gets tricky when you try to invest in a related party’s venture, whether that’s friends or family, or a member of the SMSF. You might be able to establish a unit trust for members within the fund, but you’ll need to consider the in-house assets rule - more details below.

  • Employee share schemes: If part of your employment compensation or as a bonus is a series of shares, you might need to think twice about putting them in your SMSF. It might not be considered ‘at arm’s length'.

  • Being unable to determine market value: Each year you’re required to determine the market value, which can be hard on unlisted shares with no power over financial records or directors. In the same vein, being offered shares not at market value is likely to draw the attention of the tax office.

In any case, to avoid being tripped up by the taxation rules and getting taxed up to 45% for ‘non arm’s length income' (NALI) it’s recommended you talk to a financial adviser specialising in SMSFs.

Sole purpose test

The overriding rule in SMSF land is the sole purpose test, and that sole purpose test is to benefit members in retirement. So, you will need to make sure two key forms take into consideration your investment:

Trust deed and investment strategy

A trust deed sets out the rules for establishing and operating the fund. This includes its objectives, and how benefits will be paid, which will need to allow for private company shares.

An investment strategy is a document that needs to be updated annually to account for movements in market value of assets. You will need to outline how much of your fund’s assets are directed to private company shares, the justification for doing so, and the performance of them year-to-year.

In-house assets

If the company invested-in is a related party of the SMSF, the shares are considered an in-house asset and will be subject to the ‘5% in-house asset’ rule. This means no more than 5% of the fund’s total asset value can be in that related party’s company. So, if you had $500,000 in assets, no more than $25,000 could be invested.

It’s highly recommended you seek an SMSF financial adviser before purchasing shares in a private company.

VariableMore details
  • Refinance only offer
  • No application fee and no settlement fee
  • No monthly, annual or ongoing fees

  • Refinance only offer
  • No application fee and no settlement fee
  • No monthly, annual or ongoing fees
VariableMore details

Firstmac – SMSF 70 (Refinance Special)

    VariableMore details

    Liberty Financial – Liberty Residential SMSF (LVR < 80%)

      VariableMore details

      La Trobe Financial – SMSF Residential

        VariableMore details

          VariableMore details

          Firstmac – SMSF 80 (Refinance Special)

            Important Information and Comparison Rate Warning

            Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) repayments. All products with a link to a product provider’s website have a commercial marketing relationship between us and these providers. These products may appear prominently and first within the search tables regardless of their attributes and may include products marked as promoted, featured or sponsored. The link to a product provider’s website will allow you to get more information or apply for the product. By de-selecting “Show online partners only” additional non-commercialised products may be displayed and re-sorted at the top of the table. For more information on how we’ve selected these “Sponsored”, “Featured” and “Promoted” products, the products we compare, how we make money, and other important information about our service, please click here.

            Monthly repayment figures are estimates only, exclude fees and are based on the advertised rate for a 30 year term and for the loan amount entered. Actual repayments will depend on your individual circumstances and interest rate changes. For Interest only loans – the monthly repayment figure is applicable only for the interest only period. After the interest only period, your principal and interest repayments will be higher than these repayments. For Fixed rate loans – the monthly repayment is based on an interest rate that applies for an initial period only and will change when the interest rate reverts to the applicable variable rate.

            The Comparison rate is based on a secured loan amount of $150,000 loan over 25 years. WARNING: These comparison rates apply only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees together with costs savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. Comparison rates are not calculated for revolving credit products.

            Rates correct as of December 11, 2023.View disclaimer

            Photo by Towfiqu Barbhuiya on Unsplash