Investing In Shares

Using your Self Managed Super Fund (SMSF) to invest in shares is a great way to make profits, especially if you do your research and invest wisely.

However, there are a few restrictions as to how shares can be purchased. Please read to find out more.

What shares can I invest in?

A SMSF can invest in direct shares, however purchases must be made on the stock exchange through a broker or online service.

Shares can no longer be purchased from members by way of an off-market transfer.

Benefits of investing in shares

Shares are a popular investment in self managed super funds for many reasons:

Inexpensive

A superannuation fund can buy and sell shares relatively cheaply.

E.g. A fund wishes to gain exposure to the share market. It could buy an exchange traded fund for as little as a $20 fee or the largest 10 shares in the market for $200.

Easily transferable

Most shares can also be sold quickly which can adds to the fund’s liquidity. If the SMSF needs cash to meet an unexpected financial commitment, it can use the proceeds of the sale of shares to cover those costs.

E.g. A fund trustee has invested in a high interest term deposit, leaving enough cash on hand to pay the expected minimum pension for the year.

Unfortunately, the fund member requires additional funds for an operation. Within one week they receive the proceeds from their share sales just in time.

Tax credit

The income from many shares is fully franked, which means it carries a 30% tax credit.

Since a SMSF only pays a flat 15% tax rate, the difference can be refunded to the fund.

E.g. A company pays a cash dividend of $70 (with a franking credit of $30 attached).

A fund would pay 15% tax on the $100 (i.e. $70+$30), but can claim the credit back. So paying tax of $15 less the credit of $30 would return a tax refund to the fund.

To find out more about how your SMSF can save on tax, please enquire online to get in contact with our SMSF experts.

Save on tax

Like an individual, a super fund does not pay tax on all its capital gains. For investments held for over one year, only 2/3rds of the gain is taxable, so with growth assets such as shares, this can make a large difference.

E.g. A fund makes a $10,000 gross capital gain on the sale of long term shares.

One-third of this gain is not subject to tax, so only $6,666 is taxable at a 15% tax rate. The tax payable becomes $1,000.

Tax exemptions

Members who reach pension age may be eligible to treat their super fund as tax free.

In pension mode, a super fund would not pay tax on its capital gains or other investment income.

E.g A fund has held some shares for years and they have grown in value over time.

The fund sells these shares at the right time and is eligible for a tax exemption on the entire gain.

Can your fund have 100% of its assets in shares?

There is nothing against this, however the regulator would most likely expect the fund trustee to hold a broader range of assets.

This is because it is expected that your investment strategy will include a variety of assets.

Can my SMSF engage in share trading?

Engaging in a share trading is considered as being ‘in business’ and this is allowed.

There is a fine line between buying and selling a few shares every day to re-balance your portfolio, and doing so to earn profit from trading.

The ATO will consider your investment strategy and the way you trade when assessing if you have broken the rules or breached the sole purpose test. Please see the following examples below:

Example 1

A Self Managed Super Fund purchases shares in a variety of large Australian companies. During the year, it buys other shares to gain more diversity and gets the funds by selling some of the underperforming shares. The investment strategy allows for this.

Is this allowed under the super rules? Yes, in most cases. The ATO would rarely class this behavior as share trading. The purchases and sales match the stated investment strategy.

Example 2

A SMSF purchases shares in a number of Australian companies. During the year it uses the spare cash it has to buy and sell smaller and more speculative shares, taking profits and losses along the way. It does this frequently throughout the year.

The investment strategy allows for investment in large and small companies.

This is allowed under the super rules and the ATO would rarely class this behavior as share trading unless it is particularly frequent (i.e. day trading).

The purchases and sales match the stated investment strategy and the strategy appears to meet the sole purpose test.

For more information on the types of shares that your SMSF can invest in, please enquire online and our SMSF experts will contact you to discuss your investment strategy.

Getting the right professional advice will ensure that you maximise returns and comply with all the superannuation rules.

Example 3

A SMSF buys and sells shares in both large and small companies. It does this many times per week, taking profits and losses along the way.

The investment strategy states that that the fund should maintain a balanced portfolio of shares.

This type of activity is probably not permissible under the super rules and the ATO could class this behaviour as share trading. The purchases and sales do not match the stated investment strategy.

Example 4

A self managed super fund buys and sells options and contracts for difference. The trustees believe they can make profit from trading these instruments.

Luckily, the fund makes a net return of 40% from 50 successful trades and only 10 loss making trades. The investment strategy states that that the fund can invest in derivatives.

Again, this is probably not allowed under super rules. The ATO could class this behavior as risky trading and not in the spirit of the sole purpose test, even though the purchases and sales match the stated investment strategy.

In order to invest in derivatives, like share options, there must be a risk management strategy in place.

Why speak to us?

Self Managed Super Funds are complicated structures that are heavily regulated. To get the most of your SMSF and ensure compliance with legislation, please enquire online today!

Note: this website is for informational purposes only and should not be substituted for professional financial or taxation advice.