SMSF for trading stocks

[Paul@PFI]

Ahhh Mike. Yes that's a good example of an area requiring advice before touching it with a barge pole. It doesn't seemingly fail the sole purpose test and can often be passive income. Maybe not a business on the face of it. Maybe inhouse, maybe not. However the complication can be the non-arms length income concern which is not a super issue at all. The law that concerns this is income tax. (s295-550 ITAA97)

The issue with all SMSF / Super issues is that the ITAA97 is a defacto set of tax penalties. ie non-complying, non-arms length etc...

That's why I always suggests don't touch business income in a SMSF without specific tax advice. Too often too many assume "maybe" means its all OK for them. My rule is never do it until you get advice. Nobody should get the view wrong. Its blunt sure. Its sometimes wrong but until someone gets advice from you, me or another adviser its a great rule to follow.

 

[Rob G.]

Operating a business (such as trading shares) is generally not permitted within a super fund.

To clarify: buying and selling shares is not a problem, it is only when the trading is a at a level where it is considered a business (see ATO ruling for guidelines on what constitutes a business). Any serious daytrading would probably be deemed a business. But please get your own advice.

s.295-85 ITAA97

CGT is a primary code for a complying superannuation fund.

Even if a business, CGT still applies to shares - see note to the trading stock exception. Shares are not trading stock when held by a SMSF.

Obsessive compulsive trading by a SMSF would be unlikely to be sufficient to deem a business without other facts.

However, it may be indicative of another motive other than the sole purpose test if evidence suggested the fund was more of an alter ego of the trustees !!

 

[MRO]

s.295-85 ITAA97

Shares are not trading stock when held by a SMSF.

Obsessive compulsive trading by a SMSF would be unlikely to be sufficient to deem a business without other facts.

Can you elaborate on this.

If a day trader is only holding shares during the day, closing positions at end of the day and is done repetitively in a business like manner this is generally considered trading stock. I dont understand why this would be different based on the legal entity it is done in (individual, pty ltd, trust, SMSF)?

 

[coastymike]

The government changed the law for SMSF. The change was contained in the Tax Laws Amendment (2012 Measures No. 1) Act 2012 (Cth).

The explanatory memorandum says

" during the recent economic downturn, a number of superannuation entities sought, for the first time, to treat some of their shares as trading stock

This practice creates potential uncertainty regarding the appropriate tax treatment of gains and losses made from the sale of shares owned by complying superannuation entities. This has created the need to amend the law to reduce the present ambiguity around the application of the trading stock provisions."

So an SMSF treats shares on capital account not as trading stock.

 

[Rob G.]

Taxation Laws Amendment (Superannuation) Bill 1989 introduced section 304 ITAA36 making CGT the primary code for determining whether an amount is included in assessabe income or allowed as a deduction for asset disposals by a complying superannuation fund.

This was rewritten into Subdivision 295-B ITAA97.

In other words, a SMSF speculating on shares for profit will not be assessed as ordinary income nor their losses allowed as a deduction. See ATO ID 2009/92.

To be absolutely sure that a SMSF claiming to be a business of share trading does not access any exceptions to this treatment, Schedule 2 to the Taxation Laws Amendment (2012 Measures No. 1) Bill 2012 clarifies that shares held by a superannuation fund are not trading stock. See note to table in s.295-85(4)

 

[MRO]

The government changed the law for SMSF. The change was contained in the Tax Laws Amendment (2012 Measures No. 1) Act 2012 (Cth).

The explanatory memorandum says

" during the recent economic downturn, a number of superannuation entities sought, for the first time, to treat some of their shares as trading stock

This practice creates potential uncertainty regarding the appropriate tax treatment of gains and losses made from the sale of shares owned by complying superannuation entities. This has created the need to amend the law to reduce the present ambiguity around the application of the trading stock provisions."

So an SMSF treats shares on capital account not as trading stock.

Thanks. My mistake for trying to apply logic to our tax laws!

So effectively you could operate a share trading business but be denied from treating your trading stock as trading stock.

 

[coastymike]

tax laws and logic ?

bit like the vatican investing in ansell.