Under the regulations, self-managed super funds (SMSFs) are not prohibited from carrying on a business, however the business must be:
- allowed under the SMSF’s trust deed, and
- operated for the sole purpose of providing retirement benefits for fund members.
Note however that the rules governing SMSFs prohibit or limit some activities available to other businesses, such as entering into credit arrangements or having overdrafts.
If the trustee of an SMSF carries on a business, generally the ATO will examine the activities closely to ensure the “sole purpose test” is not breached. Broadly, what this means is that your fund needs to be maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement.
Cases that attract the ATO’s attention include those where:
- the trustee employs a family member (the ATO will look at things such as the stated rationale for employing the family member and the salary or wages paid)
- the “business” is an activity commonly carried out as a hobby or pastime
- the business carried on by the fund has links to associated trading entities
- there are indications the fund's business assets are available for the private use and benefit of the trustee or related parties.
Other regulatory provisions
As the fund’s trustee, you will need to ensure that a business conducted through your SMSF complies with investment rules and restrictions applying to SMSFs.
Your investment strategy – the nature of the business activities and the way they are conducted must be in accordance with the SMSF's investment strategy.
Restrictions on investments – all investments by your SMSF must be made on a commercial “arm's length” basis. If you don't comply with the investment restrictions, penalties could apply.
Loans and financial assistance – the business activities must not involve:
- selling an SMSF asset for less than its market value to a member or relative of a member
- purchasing an asset for greater than its market value from a member or relative of a member
- acquiring services in excess of what the SMSF requires from a member or relative of a member
- paying an inflated price for services acquired from a member or relative of a member.
Acquiring assets from related parties – purchasing assets (such as plant and equipment) for use in business activities from a member or other related party could contravene the related party acquisition rules. These dictate that your fund can't acquire an asset from a related party unless it is acquired at market value and is:
- a listed security (for example, shares, units or bonds listed on an approved stock exchange)
- business real property
- an “in-house asset” (loan or investment in a related party, or asset leased to same), provided the market value of your fund’s in-house assets does not exceed 5% of the total market value of your fund's assets
- an asset specifically excluded from being an in-house asset.
Borrowing – drawing on a bank overdraft or margin lending account to fund the business activities could contravene the borrowing restrictions. Borrowing money and placing a mortgage on an asset would contravene the borrowing and charge-over assets restrictions.
Arm's length dealings – employing a member, or relative of a member, in the business at a salary higher than an arm's length rate could contravene the arm's length provisions.
Collectables and personal use assets – these type of assets owned by the SMSF can't be displayed at the business premises.
Tax Store Accountants Tullamarine.