Newsletter No. 2, February 2012

SMSF Operating a Business

The Superannuation legislation does not spell out whether a SMSF can or cannot operate a business.  But what it does spell out is that a SMSF:

  • must be established for retirement purposes
  • should have an investment strategy
  • must not borrow money to pay its expenses
  • must conduct all transactions at arm’s length
  • must not provide financial assistance to members or relatives of the SMSF
  • cannot acquire assets, apart from listed shares and business real property, from a member or a related party of the SMSF

You will find on the ATO’s website (www.ato.gov.au) a document titled “Carrying on a business in a self-managed superannuation fund” that discusses this issue.  For your reference, I have included the hyperlink to the document http://www.ato.gov.au/content/00241937.htm

The ATO has stated in this document that when determining whether a SMSF complies with the superannuation law by conducting a business, it analyses the activities of the trustee of the SMSF rather than determining whether a business is being carried on by the SMSF.

What this means is, the activities of the trustee of the SMSF must comply with all of the above dot points.  The most important one is the “Sole Purpose Test” under section 62 of the superannuation legislation.  The ATO will examine the activities of the SMSF closely to ensure that the sole purpose test is not contravened.  The ATO has also published a Self Managed Superannuation Fund Ruling 2008/2 (SMSF 2008/2) that explains in detail, with examples, the application of the sole purpose test.  For your reference, I have included the link to that document here: http://law.ato.gov.au/atolaw/view.htm?Docid=SFR/SMSFR20082/NAT/ATO/00001&PiT=99991231235958

Points to consider are:

  • The SMSF’s purpose is not determined conclusively by what outcomes actually emerge.  Rather, its purpose is determined by a judgement of what a SMSF is organised for and how it achieves this.
  • The onus is on the trustee of the SMSF to formulate and give effect to an investment strategy that has regard to the whole of the circumstances of the SMSF, including the purpose(s) for which it is maintained.
  • Contravention of the sole purpose test may arise when there is no retirement purpose behind an investment.  It is not the type of investment which must be considered for the purposes of the sole purpose test but rather it is the purpose(s) for which the investment is made and maintained that is relevant to the test.
  • An investment which is undertaken as part of a properly considered and formulated strategy, and which complies with the arm’s length rule and other superannuation legislation investment restrictions, is unlikely to cause the SMSF to fail the sole purpose test unless exceptional circumstances exist.
  • Care should be exercised by trustees and investment managers when considering investments, to ensure that the provision of retirement benefits for members is overriding consideration behind the investment decision.  However, the situation may arise where a properly considered and soundly based investment provides incidental “advantage” to members or other persons which could suggest that the SMSF is maintained, in whole or part, for an improper purpose.
  • As a guiding principle, there should always be a reasonable, direct and transparent connection between a particular scheme feature or trustee action, and the core (e.g. retirement/death) or ancillary (eg. disability/financial hardship) purposes. The more tenuous the linkage between a service or activity and the retirement savings objective, the greater will be the difficulty in the SMSF meeting      the sole purpose test.

So, with that being the case, a SMSF “may be able to” purchase a business from a NON-RELATED PARTY and conduct a business if:

  • the purposes of conducting the business is to provide retirement savings for its members and beneficiaries
  • the business investment is part of the SMSF investment strategy
  • the business account of the SMSF does not have an overdraft facility or uses a credit card
  • the business is purchased at market rate, and
  • if any of the members or relatives are employed in the business, they are paid a salary at the commercial rate, otherwise, it will be perceived as providing financial assistance to members or relatives.

Further clarification

Please do not confuse purchasing a business with purchasing a business property.  On page 54 of my book is a chapter on what type of assets can be acquired by a SMSF from a related party.  On page 56, I wrote that one of the assets that a SMSF can acquire from a related party is what is referred to as a “Business Real Property” (BRP). The legislative wording of what is a BRP is listed at the bottom of page 56 and on pages 61 to 63 I gave examples to further explain what it is.  Basically it is land and/or building(s) used in a business.  So even though your SMSF cannot acquire a business from you or from a related party, it can acquire the land and building that your business is conducted on.

Monica Rule is the author of “The Self Managed Super Handbook”.  Her advice is general in nature and readers should seek their own professional advice before making any financial decisions. 

Monica Rule