Can my client’s SMSF buy unlisted shares that she personally owns?

Potentially – it will depend on whether or not your client controls the company but even then limits apply. 

Generally, an SMSF can’t acquire assets from a related party unless the asset meets an exception in the super law. The exception that is relevant here is the one for assets which are in-house assets as long as:

• the acquisition is at market value, and 
• the acquisition does not cause the fund’s total in-house assets to exceed the 5% in-house asset limit. 

In this context, shares in a private company will be an in-house asset of an SMSF if the company is controlled by the fund members and/or their related parties.

Let’s explain this concept further with some examples. 

Marie is the member of her SMSF and director of the SMSF’s corporate trustee. She owns shares in ABC Pty Ltd and wants to transfer some of these shares into her SMSF. 

Marie’s SMSF could acquire the shares from her (at market value) if: 

• Marie and/or her related parties control the company (for example, together they own more than 50% of the shares or control the board of directors), 
• the value of the shares makes up less than 5% of the fund’s total assets, and
• the fund has no other in-house assets (eg loans to related entities, shares in controlled companies). 

Compare this to the situation of Ron.  He’s also the member and one of the trustees of his SMSF. He personally owns 2% of the shares in an unlisted company, XYZ Pty Ltd. Ron is not a director of the company, neither are any of his related parties. And his related parties do not own any shares in the company.  That is, the company is not controlled by Ron or his related parties. Ron’s shares are valued at less than 5% of the fund’s total assets. 

Can Ron’s SMSF acquire his shares in XYZ Pty Ltd? 

No.  The company is not controlled by Ron and/or his related parties.  This means the shares would not be an in-house asset of Ron’s SMSF and the exception for in-house assets would not apply. 

There is a common misconception that an SMSF can acquire an asset from a related party if the asset is worth less than 5% of the fund’s total assets. This is not true. All acquisitions from a related party are prohibited unless an exception applies. If no exception applies, the SMSF cannot acquire it – no matter how small the asset’s value.

Let’s look at one final example.  Janet personally owns shares in DEF Pty Ltd, a company controlled by her son (ie a related party). The shares are valued at $50,000 and her SMSF’s assets are valued at $350,000. The fund currently has no in-house assets.

Can Janet’s SMSF acquire all of the shares Janet owns in DEF Pty Ltd? To answer this, let’s re-visit the tests.

Would the shares be an in-house asset of Janet’s SMSF? Yes, because the company is controlled by related parties of her SMSF.

Would the acquisition cause the SMSF’s in-house assets to exceed the in-house asset limit? Yes.  The SMSF’s in-house asset ratio would be roughly 14%, far exceeding the allowed 5% limit.

This means Janet’s SMSF is not permitted to acquire all of Janet’s shares.  It could only acquire about $17,000 worth (ie up to the 5% in-house asset limit) (and the trustees would need to be careful the value of the shares remained within the 5% limit at each following 30 June). 

Of course, when considering an investment in unlisted shares, the acquisition rules of section 66 are not the only thing to be considered.  Trustees would also need to make sure:

• they were buying the shares for the right reason, 
• the investment is allowed by the fund’s investment strategy,
• the market value of the shares can be determined each 30 June, and
• the fund’s tax agent will have enough information to prove any dividends paid aren’t to be taxed as non-arm’s length income.  

The Heffron Super Companion includes all the information you need to answer questions like this, including a handy guide for clients thinking of buying unlisted company shares. Learn more here.