Can an SMSF Invest in ASX Stocks? What Australian Investors Need to Know!

For Australians who manage their superannuation, a Self-Managed Super Fund (SMSF), investing in the stock market, can be a part of a great investment strategy. But, before that, the trustees of the SMSF need to be aware of certain rules, imposed on SMSF Investments. 

According to the Australian Taxation Office (ATO), an SMSF can invest in the listed companies, which includes the shares listed on the Australian Securities Exchange (ASX), on the condition that the investment is aligned with the superannuation laws and SMSF’s trust deed. 

Can an SMSF Invest in ASX Shares? 

Simple answer: Yes, SMSFs can make investments in listed securities. However, simply because a stock is listed, does not imply that investments through SMSF should be made. 

The trustees must ensure that the investments undertaken through SMSF are compliant with the fund’s investment strategy and investment requirements. 

Your SMSF Needs an Investment Strategy

Before proceeding with making investments, it is mandatory for an SMSF to have an investment strategy. The ATO explains that this strategy consists of a plan for making, holding and realising the fund's assets.

The investment strategy should incorporate factors, including the fund’s investment objectives, types of permitted investments, liquidity and diversification. This strategy also needs to be reviewed and updated as and when necessary. 

This means that people who are in charge of the SMSF should be able to show how a decision to invest fits with the fund’s written plan for investments. 

The Sole Purpose Test Matters

One of the most prominent requirements is the Sole Purpose Test. 

According to the ATO,  the sole purpose behind the establishment and maintenance of an SMSF must be providing retirement benefits to the members, or death benefits to beneficiaries, in the case where a member dies before retirement.

This implies that SMSF investments cannot simply be arranged to give a personal benefit to members or related parties. 

What About Buying Shares From a Related Party?

There are some restrictions that apply to acquiring assets from related parties. 

In the case of listed securities, the ATO allows these to be acquired from a related party only when they are acquired at market value. 

SMSF investments must generally be made on an arm's-length basis. This means transactions should reflect market value. The ATO suggests using supportable data to determine what the market value really is.

Keep Your SMSF Investments Separate

Another important consideration is ownership of the funds assets. SMSF assets must stay separate from the assets of trustees and members.

For ASX investments, trustees must keep records that show the shares belong to the SMSF not to an individual member. 

The Bottom Line

ASX-listed shares can be an investment choice for an SMSF, however, trustees must go beyond just picking a share. The ASX-listed securities investment must comply with the fund’s strategy. Trustees must be sure to follow SMSF rules, such as the sole purpose test, the arm’s length test, the market value test and the asset ownership rules. 

Before making an investment decision, SMSF trustees should review the relevant requirements and ensure their investment decisions are properly documented.

(Source: Australian Taxation Office (ATO) - www.ato.gov.au)