Shares and Managed Funds

Investment in Australian Shares Through Your Self-Managed Super Fund (SMSF) 

Investment in Australian Shares Through Your Self-Managed Super Fund (SMSF) ​An SMSF may invest into one of the largest asset classes being listed Australian equities.

An SMSF can buy shares directly using a broker or via other mechanisms which can include managed funds and derivates.

Investing on the ASX is one of the most common investment choices made by the trustees of superannuation funds.

What are the Benefits of an SMSF including Listed Shares as part of an Investment Portfolio?

Cashflow

Shares can be easily liquidated if cash is required to pay fund expenses such as pensions or administration expenses.  In the event of a member’s death the member balance can be easily calculated to determine how much is to be paid out to the beneficiary and shares can be sold to provide cash to payout the death benefit.

Tax Advantages

Dividends from fully franked shares include a tax credit of 30% or 25% for companies with turnover of less than $50million. The SMSF pays tax at 15% on the grossed-up dividend.  The tax can be reduced to nil where the whole fund is in pension mode for all of the year.

Example – A fund receiving imputation credits from dividend income can use the tax credit to absorb other taxable income or refunded if the SMSF has no other taxable income.  In the following example a fund in 100% pension mode would receive a tax refund of $1,500.

Tip – an SMSF must hold the shares for at least 45 days to be entitled to the franking credits.

SharesDividend ReceivedImputation Credit (Franking Credits)Grossed up dividend -Taxable Income
Telstra$1,000$429$1,429
Wesfarmers$2,500$1,071$3,571
Total$3,500$1,500$5,000
Tax at 15%  $750
Refund of Imputation Credits  $750

Capital gains tax is discounted to 10% where the shares have been held for longer than 12 months and further reduced to nil if the fund is in full pension mode for all of the year.  

Diversify your SMSF Portfolio

“Do not put all of your eggs in one basket”. 

Diversity is a hedge against the risk of losses.  This can be achieved by investing into a range of shares within different industries such as mining, banking, retail and tech stocks or adding other classes of assets such as property, cash and term deposits, bonds and commodities.

Potential for High Investment Growth

Over 124 years the Australian share market has returned an average of 13.0% in accordance with the statistics from Market Index. 

In-specie Transfer of Listed Shares 

ASX listed shares can be transferred from a member or related party to the SMSF which is an exception to the prohibition on acquiring assets from a member.  It is possible to make a cashless contribution of shares to be allocated to the member’s balance in the fund.  It must be transferred at market value and the contributions caps need to be considered. The transfer is an off-market transfer, and a copy of the standard transfer form must be retained for audit purposes which identifies the buyer and seller of the shares and the date and market value underlying the in-specie contribution. The change of ownership must be lodged with the relevant share registry.

Alternatively, the shares can be transferred to the fund for cash but similar to an in-specie transfer the consideration must reflect  market valuation.

Superannuation lump sum payments may be satisfied by an in-specie transfer of listed shares to a member. Similar to the above it must be done at market value and the title of the shares transferred to the member.

Audit Considerations

ASX listed shares are every auditor’s dream investment. 

The auditor loves this class of investment as it is transparent and the title of the asset, market valuation and existence at 30th June can be easily verified for audit purposes from share registries which are independent third parties.     

Understanding SMSF Compliance 

The ATO as regulator of your SMSF monitors the compliance of an SMSF.  When a SMSF invest in Australian listed shares or other listed equities such as exchange-traded funds (ETFs) or managed funds the ATO is responsible to ensure the following compliance  requirements are adhered to.

  • Sole purpose test – a SMSF has the sole purpose of providing retirement benefits to its members and their beneficiaries. If you use your SMSF to be carrying on a business of share trading it could breach the sole purpose test.  The superannuation laws do not prevent an SMSF from carrying on a business, but queries may be raised if the volume of trading is significant. 
  • Develop and implement an investment strategy which should reflect the investment into Australian listed shares and equities.
  • Maintain investments on an arms length basis – all transactions should be made at arms length including buying and selling shares between related parties.
  • Trustees are prohibited from acquiring assets from related parties but purchasing listed Australian shares from a member is an exception provided it is purchased from a member at the market value at the time the shares are transferred to the SMSF.
  •  Lending to, or providing financial assistance, to a member of their relatives is prohibited – It is not uncommon for dividends being deposited into the personal bank account of a member, especially where the trustees are individuals. If the member does not resolve this issue the auditor may breach the fund.
  • Segregation of Assets – the title of the shares must be in the name of the trustee/s and include the fund’s designation as evidence to show the legal ownership.                    

How to Select the Best ASX Shares for Your SMSF Portfolio

Utilize online resources and subscribe to financial magazines and reports to conduct research on the stock market. Seek out a stock broker who can offer analysis on top ASX shares and assist in selecting the most favorable shares for investment decisions.

Choosing the most suitable Australian shares, that align with the trustees’ goals and the retirement objectives of fund members is crucial. The composition of equities in the fund is influenced by its life cycle.

Example – an individual who is in pension phase is in the final phase of their life cycle, and it is improbable that high-risk technology startup companies would be appropriate for inclusion in the fund’s investment strategy during this stage. It may be more suitable to consider investing in stable, well-established stocks like BHP and Woodside for this retirement phase.

Trustees have the option to consult with a licensed financial advisor for guidance on the selection of shares. Typically, financial advisors prefer using managed funds for acquiring shares. They can also help in identifying the most suitable types of shares based on the life stage of the fund’s members.

Guidelines for Buying & Selling Australian Listed Shares Through Your SMSF

The most common way of purchasing or selling ASX shares is by using a stockbroker or when a company firsts list on the Australian stock exchange making its initial offering available to the public.  We now explore some key processes when buying or selling Australian shares.

A standard transfer form is required to be completed when Australian shares are transferred to a member or alternatively paid out as an in-specie benefit to a member of the fund.

The form must be correctly dated and executed and show the correct legal title in relation to the buyer and the seller.  A copy of the transfer form must be copied and given to the auditor at year end and the original sent to the relevant share registry to update their records.  

Review Your SMSF Investment Strategy

Review and update the trustees’ objectives in the fund’s investment strategy, if required. This is particularly important if the smsf’s assets include shareholdings in one listed company. It is crucial to show why an investment strategy weighted heavily into one specific company meets the trustees’ investment objectives or benefits the members retirement.

Documenting and Reporting Share Transactions for SMSF (including Broker Accounts and Platforms)

A stockbroker’s chess account or a platform are generally the most efficient ways to establish a share trading account to be used for purchasing and buying shares and for reporting purposes in relation to the fund’s audit and preparation of financial statements and SMSF annual return.  It is crucial to ensure the documents include the trustee/s in the title when the shares are being acquired by the SMSF.  The fund’s tax file number (TFN) is required to be recorded in relation to the purchase of listed shares to avoid tax file number withholding tax.  When the TFN is provided the withholding tax will be refunded or can be claimed when submitting the SMSF annual return.

A stockbroker can provide annual trading statements showing all of the buys and sells and the linked bank transactions. Most reports are provided in an electronic format which, often, can be linked to the accountant’s software and be directly imported into the SMSFs financial statements. 

Evaluating Your Portfolio and Market Timing

There are 4 significant keys in evaluating your portfolio and ensuring the best timing to enter the market.

  • Review the risk tolerance of each member to ensure the situation or needs of the members are reflected by the Australian listed securities selected and in the investment strategy of the SMSF.
  • Monitor the share market to know when the financial markets are shifting by reviewing the latest research and financial trends. Check in with your stockbroker and financial advisor.
  • Monitor the market valuation of the fund’s investment portfolio regularly.
  • Consider the diversity of the fund investments made and where possible invest into a broad range of asset classes or at least a broad range of shares across various industries to decrease the risk of poorly performing equities.

Considerations when Selling Shares

When selling the SMSF shares the following should be considered:

  • Selecting which parcels of shares are sold to get the best possible outcome regarding capital gains tax. One of the most common methods used in FIFO (first in first out).  Capital gains tax is usually more tax effective if choosing parcels which are over 12 months old to reduce tax to at least 10% and thus using FIFO method potentially may result in the fund paying additional tax. 
  • Review carried forward capital losses which may affect which method is used to select share parcels to be sold.
  • Ensure all dividend income has been received. 
  • Consider residual minor share parcels when participating in a dividend reinvestment scheme.

 

Example – The member contributes an in-specie parcel of BHP shares to their SMSF using an off-market standard transfer form. The form is correctly completed and dated on the 20 May. The transfer form was not received by the share registry until the 1 June.  Meanwhile, a dividend was declared on the 25 May. The shares were sold ex-dividend and thus the fund was entitled to receive the dividends.  As the share registry did not process the transfer until 25 May the dividend was automatically deposited to the bank account for the member. Potentially, the fund has provided the member with a loan or financial assistance and the auditor may breach the fund.

Example – A SMSF has shares in CSL and Macquarie which are sold on 10 May.  The fund participates in the dividend reinvestment scheme.  All of the shares held on 10 May were sold.  The shares were sold as ex-dividend which means the shares were sold without any entitlement to dividends. The dividends went ex-dividend on the 5 May and a dividend was declared on the 9 May and paid on the 15 May.  The SMSF owned the shares at the date the dividend was declared and is entitled to the additional shares. The shares are not allocated to the fund until the 15 May leaving a small residual parcel in the fund’s portfolio.  

Expanding Your SMSF Investment to Include International Shares

International global shares which are listed on exchanges such as the New York or London Stock Exchange provide another level of diversity for your SMSF and access to growth opportunities in foreign jurisdictions. 

Rebalancing Your SMSF Share Investments

The fund’s share portfolio should be constantly monitored and adjusted based on the risk tolerances of the members vs reward and the investment objectives of the SMSF. Rebalancing the fund’s share portfolio can involve selling parcels of shares to purchase other shares to achieve the desired allocations.  If the fund’s share portfolio is heavily weighted in mining shares but has minimum shares in the banking sector a rebalance of the portfolio could be selling down some of the BHP shares and buying Westpac shares until the portfolio is balanced based on the investment strategy. Diversification of a share portfolio is a key objective to lower the risks and maximise the reward.

Timing of rebalancing the fund’s share portfolio needs to be considered.  Generally, it is done once or twice a year or, of course, done when it is clearly unbalanced.

Conclusion: Maximising Returns from Shares in Your SMSF

Know the risk tolerances of the members which include factors such as age, lifestyle, income and investment goals. Generally, older members will be more conservative as they head for retirement phase and may not want to invest into highly risky tech startup companies but prefer blue chip shares which provide strong dividend income with franking credits attached.

Diversify your SMSF share portfolio to spread the investment risk and protect the members retirement benefits. Diversify across various types of industries.

Select asset allocation strategies to have a mix of shares which reflect property markets, financial markets, mining markets and cash.

Individual share selection of high performing shares is critical to maximise returns.

Investing in Listed Shares – Key Takeaways

  • Have a strong investment strategy
  • Diversify your SMSF share portfolio
  • Rebalance your SMSF share portfolio
  • Monitor and evaluate share performance
  • Monitor and consider Liquidity
  • Review tax advantages
  • Consider In-Specie transfer of shares

 

Do you want to learn more about SMSF and Share Investment?

Give us a call on 1300 392 544 or get in touch online.

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Do you want to learn more about SMSF and Share Investment

Give us a call on 1300 392 544 or fill in the form above

Contact Us

If you’re interested in learning more about SMSF and Share Investment? Please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

Contact Us

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