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Self Managed Super Fund (SMSF) Article
Look before you leap into a business in your Self Managed Super Fund
By Tony Negline.
This article may be out of date.
9th June 2010
I'm often asked if a super fund can operate a business.
There are many reasons why someone might want to run a business via their super fund. Some typical, often inter-related, reasons are:
- The super tax concessions provide increased returns when the business is finally sold
- The super fund might be a useful source of seed capital to begin a business or commercialise an idea
- The super fund might be the only source of capital available to maintain or expand a business
Since the current super regulatory laws were first enacted over 17 years ago, the super industry has had various views about whether a super fund can run a business. Overall the answer was initially yes, running a business is probably okay. In the late 1990s, it changed to no. The current answer is, it depends.
This change in view is not because new rules have been introduced. The fact is, over time our understanding and use of all laws change.
Recently the ATO released a document that discusses the issue of a Self Managed Super Fund running a business.
The ATO say that when they come across any Self Managed Super Fund running a business they initially look to see that the sole purpose test hasn't been breached.
All super funds must satisfy this test at all times. As the test's name implies it requires exclusivity of purpose which the ATO says is much higher than a super fund being maintained for a dominant or principal purpose.
The situations which the ATO would look closely at are:
- the super fund's trustee employs a family member (of particular interest here will be "the stated rationale for employing the family member and the level of salary or wages paid")
- the trustee carries on a business which involves an activity commonly carried out as a hobby or pastime (eg betting on horse races)
- the super fund's business activities have links to associated trading entities, such as a business run by fund members
- there are indications that super fund assets are available for the private use and benefit of the trustee or related parties.
The ATO might also closely examine the following other important areas of the law:
- investment strategy – all super funds must have an investment strategy and the ATO would expect that the business activities and how they're conducted must be in accordance with the investment strategy
- A super fund trustee cannot lend money or provide financial assistance to fund members or their relatives – "the business activities must not involve selling an SMSF asset for less than its market value" to a member or their relative, "purchasing an asset for greater than its market value from a member" or their relative, "acquiring services in excess of what the SMSF requires" from a member or their relative
- A super fund's trustee must not acquire an asset from a member or their relative or other related parties of the super fund (there are some important exemptions to this rule) – be careful that the super fund in question does not acquire plant and equipment from a member or their relative
- A super fund is not permitted to borrow money or maintain a borrowing (again there are some important exemptions from this rule especially the super gearing provisions) – "For example, drawing upon a bank overdraft or margin lending account to fund the business activities" could be a breach of this restrictions. Similarly borrowing money or allowing a mortgage to be placed on a super fund asset would be a contravention of both the borrowing and charge-over assets restrictions
- All SMSF investment dealings must be at arm’s length or must be conducted on arm’s length terms and conditions. For example, employing a member or relative of a member in the business activities at a salary higher than an arm’s length rate could be a contravention of the arm’s length provisions.
A super fund's external auditor should probably examine these issues in great detail as well.
There is of course the issue of a super fund operating a share trading business or simply buying and selling shares. To solve this puzzle we need to determine if a share trading business is being conducted. This is not a straight forward question to answer so we'll deal with this in another article.
Anyone contemplating running a business partly or wholly via a Self Managed Super Fund needs to be aware that special tax rules may apply – called the non-arm's length income provisions – which might see the income earned on the super fund's investment taxed at the highest individual's marginal tax rate, 46.5%.
Finally it's worth pointing out that the Cooper Super System Review's discussion paper on possible changes to Self Managed Super Funds released in April did not mention if SMSFs should be banned from running a business. It remains to be seen if the review panel's final document contains this issue and whether the Government take up this recommendation.
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