SMSF investment: Trading shares is OK

Q. How often or by what criteria can you buy and sell listed shares to obtain a financial gain without being classed as a trader? I understand the trader/investor criteria outside the fund and the tax treatment but is it any different inside the fund? Is there a problem if shares are bought and sold frequently by a SMSF: for example, 200 share purchases and 200 share sales in a year, giving a total of 400 trades? Can this be considered by the ATO as being a share trader and does this then imply that a business is being run in the SMSF, which is not allowed by the ATO?

A. Yes, super funds can trade shares providing they follow the broader investment rules relating to super funds. The ATO has not yet drawn a line in the sand to indicate when buying and selling shares is merely considered part of a normal investment strategy, or something more akin to running a business as a trader.

If trading shares were not permitted within super funds, all of Australia’s big super funds would be in trouble with the regulators.

If you want peace of mind, I suggest you request specific SMSF advice for your super fund from the ATO. You can find instructions on how to do this by clicking on this link.

If you do seek specific SMSF advice, please let SuperGuide know the outcome. I’m certain many of our readers would love to read what the ATO has to say on this issue.

Background. A super fund is not permitted to run a business because it is usually considered a strong indicator that the fund has breached the sole-purpose test. A super fund must be administered for the sole purpose of providing retirement benefits for fund members. Any investment decision must be made for a future retirement benefit rather than a current benefit.

Your super fund must formulate an investment strategy rather than a business (trading) strategy and any investment decisions must be in accordance with your investment strategy. Section 52 of the Superannuation Industry (Supervision) Act 1993 states that when formulating your strategy you need to take into account:

• Risk and return: the risk of making any investment, and the likely return on that investment, taking into account your fund’s investment objectives and expected cash flow requirements.
• Diversification: the composition of your fund’s investments as a whole, and whether you’ve considered the appropriate spread of risk across industry sectors, asset classes and countries.
• Liquidity and ability to discharge your fund’s liabilities: the ability of your fund to pay taxes, expenses and benefits as they become due.

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