As is the case with each economic downturn (or catastrophe!), more people are taking control of the investments within their SMSF, or are setting up a SMSF in order to manage the portfolio themselves. Poor investment returns from adviser recommendations, managed funds or broker stock picks generally sees an increase in share trading coaching and software programs, which are marketed at people hoping to win back their losses. Others may simply want to 'play' the market based on their own research to earn better returns within super.
So, will it work? Well, with the right coaching, research or software, there's nothing to say that it won't. However, one thing that may stand in the way of such activities is superannuation legislation.
This may sound strange, but it many cases the act of share-trading is technically considered carrying on a business. Now, while there is no specific law that prohibits a SMSF from running a business, it is often considered to be in breach of the sole purpose test, which can ultimately result in both civil and criminal consequences for contravening.
It therefore needs to be determined if the investment manager of a SMSF (generally the trustee/s) is carrying on a business. In relation to a share portfolio, a starting point for this is whether the trustee is considered a shareholder or a share-trader based on their transactions.
So, what is the difference between a shareholder and a share-trader, and will such activities be in breach of the sole purpose test? Well, unfortunately there is no black and white answer to this. The answer to this question is literally determined in each individual case. However, there are some guidelines.
The main things that are considered are the nature of the trading activities, the repetition, regularity and volume of trades, the record keeping and the amount of capital invested. One of these considerations on its own will not necessarily resolve the question, but rather a combination of all in any given situation.
For example, someone who conducts daily analysis of listed companies, utilises various resources for stock research, invests in stocks through an online trading account for brief periods in order to realise a profit and makes around 60 (or more) trades a year – holding each stock for an average of less than three months would likely be seen as a stock trader and considered to be carrying on the business of share-trading. Whereas, someone who buys parcels of blue-chip shares over several years to benefit from consistent share dividends and long term capital growth would be considered a shareholder and not carrying on the business of share-trading. In each of these examples it is irrelevant of weather such activities incur a gain or a loss.
Not only is the risk of breaching superannuation legislation an issue, but there are tax and administrative implications to take into account when managing your own stock portfolio.
Holding an asset for less than 12 months means that a discount on any gain is not applied and tax is assessed on the total profit. This can reduce any net profit.
Also, from an administrative or accounting point of view, significant share trades will require a much greater workload for the administrator to produce the tax return and financials of the SMSF each year. This can increase costs dramatically – further detracting from the overall gains of the portfolio – as each trade may need to be entered into accounting software.
Trading currencies could also be affected by each of these considerations.
So, before attempting to outperform your previous adviser or broker by taking the investment management of your SMSF into your own hands, make sure that you consider the legislative, taxation and administrative implications of doing so.