Can an SMSF Invest in a Private Company?

Understanding the Guidelines and Considerations

Investing in a private company can be a lucrative option for Self-Managed Super Funds (SMSFs), but it requires careful navigation of regulatory guidelines and strategic considerations to ensure compliance and optimize investment outcomes. This article explores the key aspects of SMSF investments in private companies, offering insights and tips for trustees aiming to diversify their investment portfolios effectively.

  1. Understanding SMSF Compliance

Self-Managed Super Funds are regulated by the Australian Taxation Office (ATO) and are subject to specific provisions under the Superannuation Industry (Supervision) Act 1993 (SIS Act). These regulations ensure that SMSFs operate primarily to provide retirement benefits to their members. Trustees must ensure their investment decisions comply with these rules:

  • Sole Purpose Test: The investment must be made to solely provide retirement benefits to fund members.
  • Arm’s Length Rule: All transactions must be conducted on a commercial arm’s length basis, ensuring no preferential treatment is given to related parties.
  1. Investment Restrictions

When it comes to SMSFs investing in private companies, several restrictions need to be considered:

  • Related Party Transactions: An SMSF cannot lend to or invest more than 5% of its total assets in a related party of the fund, including private companies controlled by members or their associates.
  • In-House Asset Rule: A private company investment is often classified as an in-house asset. Keeping in-house assets below 5% of the fund’s total assets is crucial for compliance.
  1. Due Diligence and Risk Management

Investing in a private company involves higher risk due to the potential lack of liquidity and transparency compared to public companies. Therefore, conducting thorough due diligence is critical:

  • Company Evaluation: Assess the financial health, business model, growth potential, and risks associated with the private company.
  • Legal Considerations: Ensure the investment agreement and structure comply with SMSF regulatory requirements and protect the fund’s interests.
  • Diversification: Consider how this investment fits within the broader investment strategy of the SMSF to avoid over-concentration in one asset class.
  1. Strategic Considerations

Trustees should consider whether the investment aligns with the fund’s investment strategy and risk profile:

  • Return on Investment: Evaluate the potential returns against the risks. Private companies can offer significant returns but at higher risk levels.
  • Liquidity Needs: Consider the fund’s cash flow requirements, as private company investments may not be readily liquidable.
  • Tax Implications: Understand the tax consequences of the investment, including potential dividends and capital gains.
  1. Professional Advice

Given the complexities and risks associated with investing SMSFs in private companies, seeking professional advice is advisable. A financial advisor can provide insights specific to the fund’s situation, while a legal professional can ensure all compliance aspects are covered.


While SMSFs can invest in private companies, the decision should be approached with a thorough understanding of the regulatory landscape and a clear assessment of the risks and rewards. By adhering to legal requirements and implementing a strategic approach, SMSF trustees can potentially enhance their portfolio through private company investments. This dynamic investment option, however, requires meticulous planning and adherence to strict regulatory standards to safeguard the retirement benefits of the SMSF members.

This comprehensive guide provides a roadmap for SMSF trustees considering the complex yet potentially rewarding journey of investing in private companies. With proper guidance and diligent management, SMSFs can navigate the intricacies of these investments while optimizing their retirement savings.

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Sandra - SMSF Advisor

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