CFDs in a SMSF

Since Prime Minister Paul Keating introduced compulsory retirement funds (superannuation) there has been a massive flow of investment funds into the financial institutions and pressure had been building to introduce more competition into the financial planning industry. Several years ago the Australian government decided to allow taxpayers to take responsibility for their own superannuation.

If you are the trustee of a Self managed superannuation fund (SMSF) you may be considering investing in CFDs to try and increase your returns. What are CFDs?. Contracts for Difference (CFD) are, according to the Australian taxation office (ATO), "synthetic financial products that enable the investor to access the price movement in shares and other instruments such as stock indices, stock Options, currencies and futures contracts without owning the underlying product.” we also cover CFDs in more depth at the CFD select site. From past declarations by the ATO and the Australian Prudential regulatory authority (APRA) it is understood that an SMSF may only utilise derivatives as part of a general risk management strategy, therefore they can only be used to Hedge and not speculate.

Recently the ATO has given more defined viewpoints on the two types of CFD’s transactions which are offered by CFD providers (who provide CFDs 'over the counter' (OTC), therefore the CFD providers create the terms of the contract that you agree to.)

The most commonly used type of CFD requires the investor to place an amount on deposit (margin) with the CFD provider. The ATO has said that as long as the investment is for "hedging only and there is no pledging of other assets of the investor, investing in CFD’s by a SMSF will be considered within the rules of SIS Act" they go on to say "There is no loan between the CFD provider and the SMSF trustee and therefore no contravention of the prohibition on borrowing by trustees". The reasoning goes into further detail on comparing CFDs with margin Loans; "The obligations in relation to CFDs are distinguished from margin lending through a broker's margin account in relation to the purchase of shares by an SMSF, which does represent a prohibited borrowing" The full decision can be read here.

There is another type of CFD offered by providers which instead of requiring a margin, contracts the investor to pledge other assets (usually shares). The ATO has stated that as "the CFD’s providers requires the investor to pledge other assets of the investor" the trustee has "breached the prohibition against trustees giving a charge over, or in relation to, fund assets." therefore this arrangement is viewed as outside the rules of the SIS Act." Furthermore it appears that the OTC nature of CFDs has had some bearing on the decision, The ATO goes on to say; "Regulation 13.15A of the SIS Regulation, which allows trustees to give a charge over fund assets in relation to options and futures contracts in accordance with the rules of an approved body, and in accordance with the fund's derivatives risk statement, does not apply. A CFD is not an options contract or a futures contract, and the charge was not given in relation to the rules of an approved body." The full decision can be read here

So there you have it, you can and cannot use CFDs within your SMSF, depending upon your Trust Deed allowing investment in CFDs with the presence of a Risk Management strategy and the use of cash as a margin instead of the pledge of other assets. As always we urge all subscribers to seek independent professional advice with regard to the creation and operation of an SMSF and to maintain compliance.