A guide to SMSFs and share purchases

Determining whether a share purchase through a self-managed super fund contravenes the in-house asset rules could be a complex task, according to Warrick Hanley.

It is easy to take the line that if it looks and smells like an in-house asset, then it probably is.

Not only is this limiting the investment opportunities available to your clients, it is also reducing a large portion of your potential service offering and risking the possibility of clients looking for advice elsewhere.

Most people with a self-managed super fund (SMSF) are looking for greater control over their investments and often look at it as a way to invest in conjunction with their place of work.

The most common form of this is for their fund to own the business premises that they work from.

However, there are many clients who may also have the opportunity to invest in the business itself.

Let’s assume that you have a client who is looking to purchase a business through a company structure with three other individuals.

All four will be directors and equal shareholders of the business.

So, can your client have its SMSF purchase shares in the company?

We know that an SMSF cannot intentionally acquire this asset from a related party of the fund.

So therefore, the company will need to be one that is purchased from a third party. But because your client will be working in the business and a director of the business with his three associates, will it contravene the in-house asset rules?

In this case, we need to determine if this is an investment in a related party of the fund.

What is a related party of the fund? A related party of the fund includes a member of the fund, a standard employer-sponsor of the fund or a Part 8 associate of either of the aforementioned entities.

The fund is not investing in your client, so the ownership of shares is not an investment in a member of the fund.

Also, assuming that the company does not, or will not, contribute to the fund pursuant to an arrangement between the employer and the trustee of the fund, then the company is not a standard employer-sponsor of the fund either.

It is possible that the employer would contribute to the fund based on an arrangement between the employer and the member; however this does not cause the employer to be a standard employer-sponsor.

It is important not to confuse the definition of employer-sponsor (one who simply contributes to the fund) and standard employer-sponsor (contributes to the fund based on an arrangement with the fund).

The next thing to look at is whether the investment in the company is an investment in a Part 8 associate of either a member of the fund or a standard employer-sponsor of the fund.

For the purposes of this case, we will assume that the fund has no standard-employer sponsors, which is likely given the circumstances set out above.

Therefore, we need to determine if the company is a Part 8 associate of a member of the fund.

A Part 8 associate includes a relative of the client; another member of the fund, the trustee or director of the corporate trustee of the fund,  a partner of the client or a partnership in which the client is a partner, or a spouse or child of the partner, a trustee of a trust where the client controls the trust, a company that is sufficiently influenced by, or which a majority voting interest is held by the client, or another entity that is a Part 8 associate of the client or two or more of the entities listed in this paragraph.

This can sound confusing.

However, we specifically need to focus on the italacised text above because the investment is in a company.

Assuming that the other three shareholders are not relatives, partners in a partnership with the client or related to the client through interposed entities and that each equal shareholding also provides equal voting rights, then we can conclude that the client, together with any Part 8 associates, does not have majority voting rights in the company, as the client’s voting rights equal less than 50 per cent.

All that’s left to do now is define ‘sufficiently influenced by’.

This term is not specifically defined, but if the majority of the directors are accustomed or under an obligation (formal or informal), or might reasonably be expected to act in accordance with the directions of your client (directly or indirectly), then it is likely that your client sufficiently influences the company.

However, in the case where all directors have equal say in relation to the decisions of the company and your client is not the ‘leader’ or ‘head’ of the directors, then it is unlikely that your client sufficiently influences the company.

This opens up great investment opportunities for trustees of SMSFs who would like to invest in companies that fit within the investment strategy of the fund, are expected to provide sound returns for members and may require a handful of experienced acquaintances to operate to company.

Warrick Hanley is the chairman of online training resource SMSF Education.