Shares in private companies are allowable SMSF investments by iCare Super.
Before you invest your SMSF fund in a private company as a shareholder, you will need to be aware of the following:
- Make sure this investment is allowed by the trust deed and investment strategy. Please note iCare Super’s trust deed and investment strategy have automatically included this asset.
- The share acquisition must be an arm’s length transaction. The purchase price of the shares can not be below or above the market value.
- If the private company is a related party, an SMSF can only use 5% of total assets to buy shares in a private company. The 5% test applies to any point of time of the fund operation. An SMSF may breach the in-house assets rules if the other assets’ market value decreases.
- Any dividend received by an SMSF from a private company can be subject to 45% tax rate if the amount is not consistent with an arm’s length dealing.
The biggest compliance issue for investing in a private company is to determine the market value of these private shares at the end of each financial year. Some SMSF auditors accept the confirmation from the directors of the private company as the sufficient evidence of the market price. The ATO has recommended the following valuation methods:
- an independent expert valuation of assets held in the company or unit trust. If this is not available, evidence of how the market valuation was substantiated by the directors or trustees including objective and supportable data on which they relied, the valuation method they used and any assumptions made;
- the date and price of the most recent sale and purchase of a share or unit between unrelated parties.
You may need to seek processional assistance to use these valuation methods. Alternatively, you can ask the directors of the private companies if they can value the company shares to the market value as at 30 June.
SMSF trustees will make sure they can provide satisfying valuation for the shares in the private companies to avoid any compliance issues.
If you have any questions, please feel free to contact us via email email@example.com or phone 03 9557 3138.