Self Managed Super Fund (SMSF) Article
SMSFs and Taxi Licenses
By Tony Negline.
This article may be out of date.
27th June 2007
Taxi licenses are often considered good investments for various reasons and as a result some Self Managed Super Funds investors think they might make a worthwhile investment for their fund. It’s certainly true that over the years, taxi licenses have appreciated quite well.
Before a SMSF actually invests in one of these products it’s necessary to consider a range of pertinent issues:
- Trust deed – a taxi license is a right given by a government authority to receive a payment for ferrying people and their goods around in a vehicle. This is not an typical asset that most super funds would consider owning such as shares or property and a careful review of a super fund’s deed should be undertaken to ensure that such licenses can be owned by the fund
- Who currently owns the asset? Taxi licenses can only be purchased by a super fund if the license is owned by an unrelated party of the fund. This means that the asset cannot be owned fund members or their relatives. It also includes entities controlled, or legally deemed to be controlled, by the members or their relatives. A Court can impose severe penalties if this rule is breached.
Super funds can acquire a range of assets from members, relatives and controlled entities. These include securities listed on most stock exchanges and business real property. Interestingly Victorian taxi licenses must be traded on the Bendigo Stock Exchange and as a result these licenses could be transferred into a super fund.
- Investment Strategy – a fund should only deal with these assets if it suits a fund’s investment strategy. As part of the process of framing an investment strategy, fund trustees must have regard to the risk of the asset, the likely cash flow from an asset, how the asset fits with the fund’s other assets, whether the fund’s assets will help or hinder the fund meet is expected cash flow requirements and if an asset will assist the fund to discharge its current and future liabilities.
- Who is going to use the asset? The law does not allow super fund assets to be used by members, their relatives or any related entities in their income producing activities unless the asset fits into a specific exemption. Examples of this exemption are business real property. If a fund’s asset doesn’t fit into any of the available exemptions then the market value of all assets used by fund members or their relatives or any related entities must not exceed 5% of the market value of a fund’s total assets.
If a super fund gets past these rules, it also has to make sure that it satisfies the sole purpose test. This test does not allow super funds to run businesses nor does it allow a trustee to be employed by the super fund.
Typically there are two ways that taxi licenses are used. Firstly the license holder may decide to use their own car and lease it to a range of taxi-drivers. Secondly, the license holder may lease the license to someone else who then uses the license to run their taxi business.
Both these operating styles represent potential problems for SMSFs. Under the first method a super fund could be seen to be running a business. Even if the fund is deemed not be running a business, most likely, none of the taxi-drivers could be SMSF members or their relatives. Under the second method, the lease couldn’t be with a SMSF related party.
- Market Value – any asset that a super fund buys or sells must be done on an arm’s length basis. This includes the purchase and sale prices of the taxi license and the net lease revenue received
- Valuation problems - One major problem with taxi licenses is the ability to adequately determine the market price of the asset. One reason for this problem is the high variability of the purchase and sale prices of the license. Taxis are still considered to be a bit of a luxury and their popularity can fall away quite quickly if travelers begin to slightly struggle with their finances. The opposite is also true – when people have lots of money to spend, taxis are often in big demand. The income earned by taxi drivers obviously feeds into the market value of the licenses.
Further most Australian governments severely restrict the number of taxi licenses thereby making the asset very scarce. This restricted supply helps to inflate the market price of the asset.
One the risks of holding an asset of this sort is that if a government decided to issue many more taxi licenses, the market price of all existing licenses would fall. A difficult problem for all super funds holding this type of license is to determine a suitably realistic valuation for the asset. That sale price might only have a very short shelf-life.
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