SMSFs: Purchasing options is OK, and even sometimes CFDs

Q: Can a SMSF buy/sell call/put options? I understand that CFDs are not permitted because it breaches the charge over asset regulation. However, is that true that options are derivatives and in giving shares as a collateral (when writing options) to the Options Clearing House, it will treated differently (an exemption) as long as the SMSF has a derivatives risk management statement?

Trish’s response: Before I answer your question about options, I need to clarify your comments about contracts for difference (CFD). In certain circumstances, the Australian Tax Office has indicated that CFDs are allowable investments for self-managed super funds (SMSFs), provided that cash is used as collateral for any margin payments on the contract, rather than using fund assets as collateral. Now, in my view, cash is a fund asset, and I’m surprised that the ATO has taken this view on CFDs but there you have it, although I would be closely following the ATO’s views if any SMSF trustee is considering using CFDs within his or her fund. (If you want to read more about the ATO’s view on SMSFs and CFDs, check out the ATO website).

In response to your question on options: Derivatives, such as options, are allowable investments for a SMSF, subject to certain conditions, including:

• ensuring that the fund’s investment strategy (and trust deed) permits the SMSF to purchase options and
• the fund has a derivative risk statement, that is a statement that explains the SMSF’s risk management policies when using derivatives.

For the most part, options are used as a hedging tool to minimise the volatility in an investment portfolio, although some investors use options as a pure trading tool for profit. Any SMSF trustee considering using options within a SMSF portfolio needs to confirm the use of such instruments with the ATO and/or with the fund’s adviser.

Note: Anyone considering derivatives within a super fund should also read Regulation 13.15A of the Superannuation Industry (Supervision) Regulations 1994, for some background on the use of collateral and derivatives.