Self-managed super funds are permitted to hold shares in a private company, though the rules governing that investment are considerably stricter than for listed shares. The sole purpose test, the in-house asset limit, the related party acquisition rules and the non-arm’s length income rules all apply, and a breach can trigger significant compliance penalties. Understanding these requirements before committing fund assets protects both the investment and the fund’s compliant status.
Trustees exploring how to diversify their fund beyond listed shares, property and cash often ask whether an SMSF can invest in a private company. The short answer is yes, but the arrangement sits under considerably more scrutiny from the Australian Taxation Office than a straightforward purchase of ASX-listed shares, and getting the structure wrong can be costly.
SMSF Investment in Private Companies: The Starting Rules
Every SMSF investment, regardless of asset class, must satisfy the sole purpose test in section 62 of the Superannuation Industry (Supervision) Act 1993 (SIS Act). The investment must genuinely exist to provide retirement benefits to fund members. Investing in a company a member is involved in is not automatically a breach, but an investment made to prop up a member’s business, assist a friend, or deliver a current-day benefit to a member or their family is.
Trustees also need to check their fund’s trust deed and investment strategy before proceeding, since an investment that falls outside the fund’s strategy is a breach worth avoiding.
SMSF Rules for Private Company Investments: The In-House Asset Test
The most significant hurdle for private company investments is the in-house asset rule. An SMSF cannot acquire an in-house asset if doing so would take in-house assets above five per cent of the fund’s total assets, and an investment in a private company that is a related party of the fund will generally be classified as an in-house asset.
A related party is defined broadly, covering fund members, their relatives and other associates, and any company those people control. Under the control tests in Part 8 of the SIS Act, a company is generally controlled where members and their associates hold a majority of the voting power, or where the company is accustomed or obliged to act on their directions even without formal majority ownership.
What Counts as an In-House Asset
- A loan made by the fund to a related party.
- An investment in a related company or related unit trust.
- A fund asset that is leased to a related party, subject to certain exceptions.
The Exception for Certain Related Companies
Shares in a related company are excluded from the in-house asset rules where the company meets the strict conditions in regulation 13.22C of the SIS Regulations. These include that the company has no borrowings, does not lend money, does not hold interests in other entities, and does not conduct a business. In practice, this means a trading company run by a member will almost never qualify.
The Five Per Cent Limit in Practice
If a fund holds one million dollars in total assets, it cannot acquire a further in-house asset once in-house assets reach fifty thousand dollars. Because asset values move, a fund that was compliant at the time of purchase can later exceed the limit simply because its other assets have fallen in value. If in-house assets exceed five per cent at 30 June, the trustees must prepare a written plan to reduce them during the following financial year, which is why ongoing monitoring matters as much as the initial decision.
Can an SMSF Buy Shares in a Private Company That Is Not a Related Party?
Where the private company is genuinely unrelated to fund members, meaning no member or associate controls it, the in-house asset rule generally does not apply, though the sole purpose test and ordinary investment governance still apply in full. The trustees still need to be satisfied the investment fits the fund’s overall strategy.
Who the shares are bought from matters too. Section 66 of the SIS Act generally prohibits acquiring assets from a related party. Shares in a related company can be acquired from a related party at market value, provided the purchase keeps in-house assets within the five per cent limit. Shares in an unrelated private company, however, generally cannot be bought from a member or relative at all, since unlisted shares are not a listed security and are not an in-house asset.
Restrictions this technical are exactly where trustees run into trouble without specialist guidance, which is the structuring work Rivkin SMSF handles with trustees every week, checking related party status, valuation requirements and in-house asset exposure before any documentation is signed. Trustees considering a direct private company holding should speak with our SMSF team before committing capital, so the structure is right from the outset!
Dividends and Non-Arm’s Length Income
Dividends from private companies receive particular attention under the non-arm’s length income (NALI) rules. A dividend paid by a private company to an SMSF is NALI, taxed at 45 per cent, unless the amount is consistent with an arm’s length dealing. Factors include the value of the shares, the price the fund paid, and the company’s dividend history.
Private Company Shares and SMSF: Valuation Requirements
Unlisted shares carry no public market price, which makes annual valuation considerably harder than for an ASX-listed holding. Trustees must arrive at a defensible market value each year for the fund’s financial statements, based on objective and supportable evidence. An independent valuation is not mandatory every year, but is often advisable, particularly where the holding is material to the fund’s total assets.
A qualified accountant experienced in SMSF compliance can help trustees document a valuation approach that will withstand scrutiny from the fund’s auditor and, if required, from the regulator itself.
SMSF Investment Restrictions on Private Companies: What Trustees Should Not Ignore
| Requirement | What It Means |
|---|---|
| Sole purpose test | The investment must exist to provide retirement benefits, not a present-day benefit to a member |
| In-house asset limit | No more than 5% of total fund assets in in-house assets, unless the company meets the Regulation 13.22C conditions |
| Related party acquisition rule | Related company shares can be bought from a related party only at market value within the 5% limit; unrelated private company shares cannot |
| Non-arm’s length income | Private company dividends must be consistent with an arm’s length dealing |
| Valuation requirement | Market value must be reassessed and documented each financial year |
Frequently Asked Questions
Can my SMSF invest in a company I already run?
It is possible, but if you or your associates control the company, the investment will typically be an in-house asset capped at five per cent of total fund assets. A company that conducts a business cannot use the regulation 13.22C exception.
What happens if my fund breaches the in-house asset limit?
Trustees must prepare and carry out a written plan to bring the fund back within the limit, and ongoing or deliberate breaches can attract significant penalties from the regulator.
Do I need a formal valuation every year?
SMSF trustees must value all fund assets, including unlisted shares, at market value each year. That value must be supportable, but it does not always need to come from an independent valuer.
Is investing in a private company through an SMSF worth the added compliance burden?
This depends on the fund’s size, the trustees’ risk tolerance and the specific opportunity involved, and is best assessed with a qualified professional before any commitment is made.
Conclusion
A self-managed super fund can hold shares in a private company, though the path is considerably narrower than for listed shares once the sole purpose test, in-house asset limit and related party rules are taken into account. Careful structuring and annual valuation discipline are what separate a compliant holding from a costly breach.
Getting the structuring and valuation discipline right from day one is far easier with specialist support than after a breach has already happened, which is exactly where Rivkin SMSF steps in, working through every ATO requirement with trustees before capital moves. If your fund is weighing up an unlisted holding, talk to our SMSF accountant in Australia team and get the compliance groundwork sorted before you commit!
“This article is general information only. Whether an investment suits your fund depends on your circumstances, so professional advice should be obtained before acting.”
