In this guide
Investing in shares is extremely popular for SMSF trustees. In fact, over 27% of all SMSF assets are held in listed shares, making it the most preferred asset class for SMSF investing.
What might come as a surprise is that SMSFs also hold close to $14 billion in shares in companies that are not listed or traded on a securities exchange, referred to as unlisted shares. Essentially, these are investments in private companies.
If you are an SMSF trustee thinking about investing in a private company, here are a few of the pre-investment issues to consider.
The sole purpose test
All SMSF investments need to be made and maintained in line with the sole purpose test. That is, for the sole purpose of providing retirement benefits for the fund members or their dependents on death.
An investment should only be made in a private company where it is in line with the sole purpose test. It should never take place where there is an intention to provide a current-day benefit to a member of the fund, to a family member, or to benefit a friend or acquaintance personally.
Example
David runs a small consultancy firm that is struggling to survive financially and is close to folding. His friend Peter is persuaded to invest $200,000 from his SMSF into David’s private company in a bid to keep it afloat.
This investment would not meet the sole purpose test as it was not entered into with an intention to benefit Peter’s fund members in retirement. It was only carried out to benefit David personally.
Learn more about the sole purpose test.
