Mastering SMSF Investment Rules for Optimal Portfolio Growth

Generally, you are not allowed to use your SMSF to run a business, borrow money or acquire a holiday house. These “grey area” investments are referred to as in house assets. In house assets can make up only 5% of the total asset value of a Fund, so be careful not to breach the SMSF sole purpose test. The most important consideration with an SMSF is that all investments are for retirement purposes only.

Running a business in an SMSF is generally considered a strong indicator that the Fund has breached the sole-purpose test. In a limited number of circumstances, you can run a business in an SMSF, but anyone thinking of doing so is strongly advised to have a thorough read of the ATO fact sheet ‘Carrying on a business in a SMSF’ released 25 May 2010. An SMSF must be administered for the sole purpose of providing retirement benefits for Fund Members. Any investment decisions taken must be for the sole purpose of deriving a future retirement benefit and not a current benefit.

Holiday house

If your SMSF buys a rental property, whether it’s residential or commercial, it is all legal and in order, provided the SMSF Trust Deed and SMSF Investment Strategy allows for this. The SMSF can even buy a holiday house as long as it is rented out through an agent on the holiday market rate.

Deriving personal benefit from this asset is a big NO-NO. If the Trustees stay in the holiday house, even off-season, the ATO will classify the total asset as in-house. And if the value of the holiday house is greater than 5% of the total assets in the SMSF (which it usually is), and is also considered an in-house asset, the SMSF will lose the concessional tax treatment of 15% and be taxed at the marginal tax rate of 45% (plus Medicare Levy of 2%).

Carrying on a business of share trading

To the question: Is it acceptable to trade shares in an SMSF? The short and simple answer is YES..

All the big retail superannuation funds trade shares and when investing in superannuation, buying and selling are inevitable.

The question of the acceptable level of share trading is a little more difficult to answer. There’s no real guidance in this area apart from the fact that trading should be supported by your SMSF’s Investment Strategy. When Superannuation Warehouse sets up a new SMSF, we provide you with an Investment Strategy template. As Trustees of the Self-managed Superannuation Fund, it’s up to you to make sure that what you plan to do or trade is noted down in the Investment Strategy.

Whether an SMSF is an active share trader or an investor is determined case by case and depends on the intention of the trades, i.e. why the buys and sells are made. In court cases, factors taken into account to establish the trading status of an SMSF are as follows:
1. the nature of the fund’s activities, particularly whether they have are aimed at making profit
2. the repetition, volume and regularity of the activities, and their similarity to the activities of other businesses in your industry
3. the keeping of books of accounts and records of trading stock, business premises, licenses or qualifications, a registered business name and an Australian business number
4. the volume of the operations, and
5. the amount of capital employed.

Why is this important?

Because, as Trustees, you don’t want to breach the sole purpose test (providing retirement benefits to members). If you do, you run the risk of losing the concessional tax treatment given to SMSF’s.

Is share trading etc. “carrying on a business”?

The ATO also has concerns that some investment activities by SMSF Trustees — such as share trading and making certain ‘tax effective’ investments — may amount to carrying on a business. If those activities are carrying on a business, then — again — the SMSF may lose its complying status and the Trustee or SMSF may face penalties.

The ATO’s concerns outlined above reflect its regulatory imperatives in ensuring SMSF Trustees comply with:
• the sole purpose test, and
• investment rules in general.
It is important that Trustees are aware of, and comply with, the investment rules set out in the SISA. The key things to remember are:
• develop an investment strategy and stick to it; and
• make and maintain investments on an arm’s length basis. This can be determined by asking whether a prudent person acting with due regard to his or her own commercial interests would have made such an investment.
Trustees must NOT:
• acquire assets from related parties (although there are certain exceptions); or
• lend to, or provide financial assistance to, other members of the SMSF or to their relatives.

Extreme example

A Trustee might decide that playing roulette would make a good investment strategy, and “invest” in red or black. As long as it is an investment strategy, the Trustee can go with it. It is legal. Now, although we would never condone anything as extreme as this, it does illustrate just how much freedom and responsibility the Trustee is given when it comes to acting in the best interest of the SMSF.

Can an SMSF invest in a private company

Your SMSF can invest in a private or public company, even if you work there. The criterion is that you do not have a controlling voting right. If you do, your investment will be regarded as an in-house asset, which cannot be more than 5% of your total SMSF’s assets.

See the ATO Tax Ruling 2009/4 on investments in companies that are considered related parties. Paragraph 157 of the ruling states that when you control 50% of a company, an investment in the company is regarded as an in-house asset.


Yes, SMSF’s can trade shares, providing they follow the SMSF’s investment strategies. As yet, the ATO has not made any pronouncements as to whether the buying and selling of shares constitutes part of a normal investment strategy, or something more aligned to running a business as a trader.

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