A common strategy that we’re seeing with a few SMSFs lately is to hold options over long-term share portfolios as part of a hedging strategy. Some investors take this a step further and trade with some sort of regularity; to the point where as an individual, trust or company, we would expect their activities to be considered business-like and taxed as ordinary revenue instead of capital gains.

However, as we know, a SMSF is not allowed to run a business. The tax office also have provisions that exclude these activities from the usual trading vs investing rules, and declare all such things to be on capital account instead.

The tax office have released a few rulings to show their line of thinking, which you can read here, here, and here.

The key point, though, is featured in all three rulings and looks something like this:

The provisions relating to the taxation of complying superannuation funds (including SMSFs) are contained in Division 295 of the Income Tax Assessment Act 1997 (ITAA 1997).

Section 295-85 of the ITAA 1997 makes the CGT rules the primary code for determining the tax treatment of the gains or losses generated on the disposal of an asset by a complying superannuation fund.

Paragraph 295-85(2)(a) of the ITAA 1997 modifies the normal CGT rules so that a CGT event happening to a CGT asset of the Fund is not affected by the following provisions:

  • section 6-5 of the ITAA 1997 (ordinary income),
  • section 8-1 of the ITAA 1997 (amounts you can deduct), and
  • sections 15-15 and 25-40 of the ITAA 1997 (profit-making undertakings or plans)

Remember though, that anything that a SMSF chooses to invest funds into must comply with the current investment strategy. So, trading complex financial instruments will need to be clearly defined and shown to meet the sole purpose of  providing for the Members’ retirement benefits, without undue risk; otherwise, the SMSF could still be caught out and penalised severely. As always, talk to your accountant and financial advisor before taking too many steps in that direction.