Can a SMSF Invest in a Private Company? Strategies for Growth

Self-Managed Super Funds (SMSFs) have become popular for Australians looking to control their own retirement savings. One of the choices a trustee might face is whether it’s possible, or wise, to have the SMSF invest directly in a private company. Yes, the rules do let SMSFs invest in private companies—if strict conditions are followed.

Can a SMSF Invest in a Private Company and What Does It Mean

Yes, a Self-Managed Super Fund (SMSF) can invest in a private company, but this is subject to strict rules from the Australian Taxation Office (ATO). The regulations are especially stringent when the private company is a “related party” of the SMSF, its members, or their relatives.

Here’s an overview of what this involves:

• The SMSF’s main purpose always has to be providing retirement benefits to its members. Every investment decision, including buying private company shares, needs to support this.
• Trustees have to make sure any investment—especially in an unlisted or private business—fits the fund’s strategy. That means thinking about risk, the lack of easy access to cash (liquidity), and whether this moves the fund towards its long-term goals.
• There are limits and restrictions, like not going over 5% of the fund’s value when investing in private companies that might be related to a member.

Table: SMSF Investment Checklist for Private Companies

• Trustees have to be sure every deal is on commercial terms. That means no special favours to mates, family, or your own business.
• It’s up to the SMSF trustee to document exactly how investing in a private company fits the fund’s investment plan—and keep records to back it all up.

Before diving in, pause and check: is this actually going to work for your SMSF? Not every private company investment will suit every fund, and compliance is non-negotiable.

Legal & Regulatory Framework: Can a SMSF Invest in a Private Company Under the SIS Act

When it comes to SMSFs investing in private companies, the Superannuation Industry (Supervision) Act 1993 (SIS Act) is the main piece of legislation setting the ground rules. An SMSF is permitted to invest in a private company, but only if it complies with specific requirements laid out in the SIS Act and overseen by the ATO.

Key points trustees need to consider under the SIS Act:

• Investments must be made for the sole purpose of providing retirement benefits (the sole-purpose test).
• All transactions have to be done on an arm’s-length basis—meaning the same terms that would apply if you were dealing with a stranger, not a family member or business partner.
• The fund must avoid accumulating more than 5% of its assets in in-house assets, which includes investments in related private companies.
• There are strict restrictions on lending money to members or relatives and on acquiring assets from related parties unless certain exemptions apply.

Here’s a summary of core SIS Act requirements for SMSF investments in private companies:

Following these legal standards is not just about ticking boxes—falling short can trigger substantial financial penalties and force your SMSF to unwind investments at a loss.

If you want to include private companies as part of your SMSF’s investment strategy, start by checking that it fits these SIS Act criteria. Failing to do so can put your fund’s compliance and retirement savings at risk, so it pays to get it right from the outset.

Key Compliance Tests: Can a SMSF Invest in a Private Company and Meet the Sole-Purpose & Arm’s-Length Requirements

When trustees consider putting SMSF money into a private company, there are strict rules about why (and how) this can be done. The focus is on two things—meeting the “sole purpose” test and making sure everything’s at arm’s length. Skipping these steps can lead to tough penalties, not just a slap on the wrist.

Every SMSF investment must have one clear goal: building retirement benefits for fund members—nothing else. That’s what the sole purpose test is all about. You can’t use fund money to prop up a family business or help out a mate. Even if the investment looks smart financially, if it’s not tied directly to retirement savings, it’s not on.

Keeping things at arm’s length is a whole other hurdle. This means any investment or transaction has to be just like it would be with a stranger. You can’t give mates’ rates or fudge the numbers on value. The ATO takes this very seriously—private company shares need to be bought at what they’re truly worth, and dividends or returns must reflect market standards. If the ATO decides a deal wasn’t on commercial terms, your SMSF could be taxed at a whopping 45% on those returns (highlighting the importance).

Here’s a simple table for how these standards compare:

When SMSFs invest in private companies, trustees should always:

• Document how the investment furthers the retirement goal.
• Arrange independent valuations and keep written evidence.
• Make sure all returns—dividends, capital gains—are in line with actual market rates.
• Avoid any deals that look like they favour members or related parties.

Strict compliance with the sole purpose and arm’s length rules doesn’t just tick off a checklist—it protects your SMSF from steep taxes and ATO headaches down the line.

So, yes, an SMSF can invest in a private company, but only after it jumps these compliance hurdles honestly and with regular recordkeeping. Otherwise, the risks can quickly outweigh the benefits.

Related Parties & In-House Asset Rules: Can a SMSF Invest in a Private Company Without Breaching Limits

When thinking about investing SMSF funds into a private company, related party and in-house asset rules become a real sticking point. Trustees need to be careful not to let their SMSF cross the lines set by regulations, especially the tough 5% in-house asset rule.

The main issue here? The Australian Taxation Office (ATO) wants to be sure SMSF investments aren’t just being used to support businesses connected to the trustees or their families. If the company falls into the ‘related party’ category, any shares or loans to that business might be counted as in-house assets. There’s a strict cap—no more than 5% of the fund’s assets can be tied up in these types of investments at the end of the financial year. Go over, and the ATO expects trustees to promptly sort it out, even if that means selling shares at a bad time.

Here’s a quick guide to understanding the types of SMSF assets considered ‘in-house’:

For a clearer idea, let’s break down the practical steps trustees should take:

• Regularly value the total SMSF and private company investment so you know where you stand against the 5% rule.
• Immediately draw up a written plan to fix any breach if the 5% cap gets exceeded, and take action before the next year ends.
• Use independent experts to value company shares—don’t rely on a best guess.
• Keep thorough documentation showing all transactions are truly at arm’s length, as SMSF trustees shouldn’t acquire assets from related parties.
• Make sure any investment lines up with the fund’s documented strategy and sole-purpose test.

If an SMSF fails to keep in-house assets under control, the consequences can reach beyond compliance headaches into real financial pain, especially if selling is forced when values dip. Keeping records sorted and monitoring limits will save stress down the track.

Valuation, Documentation & Trust Deed: How Can a SMSF Invest in a Private Company Properly

When an SMSF wants to invest in a private company, careful preparation and record-keeping are important from the start. The ATO will expect clear evidence that every decision you make is sound and compliant. Unlike listed companies, private businesses have no public price reference, so it’s up to trustees to establish true market value and keep ongoing records.

Here’s what trustees need to do to invest correctly:

• Get a credible, independent market valuation before purchasing shares in a private company — don’t rely on your own estimate or guesswork.
• Record how the investment fits the fund’s written investment strategy and state why it meets the retirement needs of members.
• Prepare detailed transaction records showing that the deal was at arm’s length — as if you were buying from a stranger, not a mate.
• Value the investment each year — this is extra important if the company is related to members, to make sure you don’t breach the 5% in-house asset cap.
• Store all company reports, agreements, valuations, and trustee meeting minutes safely. If the ATO audits you, everything should be easy to find.

A sample checklist for documentation:

The trust deed of the SMSF needs to allow investing in private companies. If your deed is old, have it reviewed before investing — deeds often set out limits on unlisted investments or related-party dealings. Making sure the deed supports the investment will protect you (and your fund) from costly compliance errors later.

Keeping all your paperwork and valuations organised doesn’t just tick an ATO box; it makes unwinding a bad investment much easier if things don’t go to plan.

Leveraging Regulation 13.22C: Can a SMSF Invest in a Private Company Using Special Exemptions

Regulation 13.22C gives SMSF trustees a real chance to invest in private companies without instantly falling foul of the in-house asset rules. In most cases, an SMSF investment in a private company connected to members or their relatives is classed as an in-house asset, and the SMSF can’t go above the 5% mark of total fund assets. With Regulation 13.22C, though, there are some narrow exemptions. If the private company meets specific conditions, the SMSF’s investment isn’t counted as an in-house asset at all.

Here’s a quick look at what a private company must do to qualify:

• The company is not allowed to have any borrowings.
• It must not lease assets to any related parties.
• The company can’t have investments in other entities.
• No loans or financial assistance to related parties.

If just one of these is breached, the exemption is lost and the SMSF will need to include the value as part of the in-house assets, which could spell trouble fast if values rise or fall.

• Trustees should regularly check that the private company keeps satisfying all the requirements, not just at the time of investment.
• Agreements, company constitutions, and loan documents should be carefully drafted so there are no accidental breaches.
• Professional input from SMSF accountants or legal advisers can reduce headaches if there’s confusion about compliance.

Even with Regulation 13.22C, SMSF investments in private companies call for careful monitoring, detailed paperwork, and a clear understanding of the risks and consequences if things don’t go to plan.

Risk Management & Liquidity: Can a SMSF Invest in a Private Company While Mitigating Growth Pitfalls

Investing your SMSF in a private company comes with a unique set of risks and challenges, especially when it comes to liquidity and managing the unpredictable nature of private business valuations. Private companies are often illiquid, so selling shares quickly to meet fund obligations can be tough. This reality makes it crucial to build a solid risk framework before any investment takes place.

Key steps to handle these risks:

• Assess the private company’s financial strength and prospects before investing.
• Ensure your SMSF’s investment strategy takes into account liquidity needs—plan how you’ll pay pensions or lump sums if most assets are tied up in private company shares.
• Regularly review the proportion of fund assets invested in private companies to avoid breaching regulatory limits.
• Set up clear procedures for valuing these assets, just as you would for property or other non-standard investments.
• Maintain detailed records to satisfy any ATO scrutiny—document decisions and valuations meticulously.

Here’s a simple table showing the differences between listed and private company investments for SMSFs:

Failing to plan for liquidity can force an SMSF to sell assets at the wrong time, turning a manageable risk into a costly mistake.

Regulatory requirements from the ATO demand special care with private company investments—so keep a regular check on compliance triggers, like the 5% in-house asset rule, to avoid unwanted surprises. For a broader view of permitted and restricted SMSF assets, you’ll find more clarity on ATO rules here. Getting this right is all about balancing your SMSF’s growth ambitions with clear-eyed planning for the ups and downs of private company ownership.

Growth Strategies: How Can a SMSF Benefit Long-Term from Investing in a Private Company

When you think about growing retirement savings, private companies don’t always spring to mind. But for SMSFs, there are ways this option can support stronger, tailored investment plans over the long run. Private company investments open up avenues that often aren’t available in more traditional assets. Trustees with specific industry expertise can use their knowledge to identify businesses with strong, long-term growth potential — often in sectors they know well or even family-owned ventures.

Here’s how long-term benefits can show up for SMSFs investing in private companies:

• Tax advantages: With proper compliance, capital gains can be taxed at concessional rates inside the SMSF, supporting wealth growth.
• Better diversification: Private company stakes can lower reliance on property or public shares, making your retirement portfolio steadier over decades.
• Support for Australian small businesses: SMSF capital can help newer or fast-growing businesses expand, while getting exposure to entrepreneurs and industries you trust.
• Customisation: Trustees make the investment decisions, so investments can be chosen that align closely with your unique retirement goals.

A comparison of common SMSF strategies:

Good long-term growth for your SMSF is possible with private companies, but it’s not automatic. Sticking to your strategy, keeping records, and focusing on the big picture all matter. This approach could tee your fund up for strong retirement outcomes, but only if risk and compliance are always a top priority.

What matters most is ensuring every investment matches your SMSF’s strategy, fits into a balanced portfolio, and always follows current superannuation rules. That way, the growth potential isn’t traded for unwanted surprises down the track.

Investing your SMSF in a private company can help your fund grow in the long run. Not only can it build wealth, but it also opens up new chances for better returns. If you want to learn more about how your SMSF can benefit from this smart growth strategy, check out our website now and get in touch with us!

Frequently Asked Questions

Can my SMSF invest in a private company?

Yes, your SMSF can invest in a private company. However, you must follow strict rules set by the ATO. The investment needs to fit your fund’s investment strategy, and you must make sure it is for the sole purpose of providing retirement benefits.

What is the 5% in-house asset rule for SMSFs?

The 5% in-house asset rule means your SMSF can only invest up to 5% of its total assets in related parties, including private companies connected to you or other fund members. If you go over this limit, you must make a plan to fix it by the end of the next financial year.

Do I need to get my private company investment valued?

Yes, you need to get an independent and fair market valuation when your SMSF invests in a private company. You should also update the valuation every year to make sure you are still following the 5% rule and other ATO requirements.

Can I use my SMSF to run a business or control a private company?

No, your SMSF cannot be used to run a business or control a private company. If you or other fund members control more than 50% of the company, the investment will be treated as an in-house asset and counted towards the 5% limit.

What documents should I keep when my SMSF invests in a private company?

You should keep clear records of the investment decision, how it fits your fund’s strategy, proof of independent valuation, and all transaction details. This helps show the ATO that you are following the rules.

What are the risks of investing my SMSF in a private company?

Investing in a private company can be risky because these companies are not listed on the stock market, so their value can change a lot. There is also a risk of breaking ATO rules, which can lead to big fines and even losing tax benefits for your SMSF.