An SMSF is allowed to invest in Private Company shares as long as the Fund’s Investment Strategy allows for it. However, they have more complex valuation requirements and Trustees must ensure that they can provide complete documentation to satisfy audit requirements every annual return.
Types of Private Shares
1. Normal Company (Unlisted Shares)
Shares of privately held businesses that aren’t listed on a stock exchange. Although their shares are not traded publicly, these corporations function like regular businesses.
2. IPO (Initial Public Offering)
Investment in businesses getting ready to go public on a stock exchange. SMSFs may take part in initial public offerings (IPOs) before to or concurrently with the company’s public listing.
3. Private Capital Raising
Investment in businesses that use share placements to raise money privately. These are not available on public marketplaces and are usually sold to a limited number of investors.
Valuation Requirements for Audit Purposes
SMSFs are required to value private shares at market value each year for financial reporting and audit compliance. To support the valuation, the following documents are typically required:
- Audited Financial Reports
Independently verified financial statements that provide a reliable basis for assessing the company’s value. Auditors will typically review the Statement of Financial Position and assess the underlying assets and liabilities of the company. Where assets such as property are held, SMSF trustees must ensure they are recorded at market value. As company financial reports are often prepared on a cost basis, auditors may require an independent appraisal to support the market value of such assets. - Management Report
Provides insight into the company’s financial performance and position. - Recent Share Sales
Evidence of recent transactions involving the same or similar shares, such as a letter of scheme of arrangement or formal notices issued by the company. - Press Releases
Public announcements that may affect the company’s value. - Accountant Letter
Independent valuation or confirmation of the share value by a qualified accountant.
Typically, if supporting documents cannot be provided, the auditors may qualify part A of the audit. We explain more in this type of Qualification here.
Q&A
Can you sell personally owned shares in a private company to your SMSF?
No, an SMSF is not allowed to acquire assets from a related party, except for listed shares and business real property
Can an SMSF sell its shares in a private company to a member or a related party?
Yes, an SMSF can sell assets, including shares in a private company, to a member or a related party, provided the transaction is conducted on an arm’s length basis and at market value.
The sale must reflect true market conditions, with appropriate supporting documentation to substantiate the price.