Can a SMSF Carry on a Business?
There is nothing in the SIS Act to prohibit your self-managed super fund from carrying on a business or to buy a business.
However, why would your SMSF run a business with so many prohibitions and restrictive rules? The business would find it difficult, if not impossible, to undertake normal business operations such as running an overdraft, borrowing, using a business property or other business assets as security for a loan, lend money or provide financial assistance to fund members or their relatives and restrictions on lending to related parties. SMSFs must undertake all transactions and business activities on an arm’s length basis.
The trust deed needs to permit the fund to engage in business activities, although some deeds may explicitly forbid it. The SMSF’s investment strategy should incorporate the SMSF trustee’s rationale for how the business aligns with the fund’s goals and will enhance the retirement benefits for members. The decision to carry on a business must comply with the investment restrictions under the Superannuation Industry (Supervision) Act 1993.
What SIS Rules should a SMSF focus on when Running a Business?
The sole purpose test is one of the major blocks for running a business through your SMSF. We discuss this further below. Other investment rules and restrictions applying to a SMSF running a business include:
- Prohibition to borrow money – an overdraft account or a margin lending account to fund the business activities would not come under an exception under s67A which, amongst other things, allows borrowing to purchase commercial property which is business real property.
- Lending money or providing financial assistance – typically small business operators borrow money from the business which is prohibited under s65 of the SIS rules.
- Non-arm’s length transactions – business activities involving related parties is common, but the business activities could contravene the arm’s length rules which could be breached if the market value of certain activities are either too high or too low. Higher than market salary or wages paid to a family member or payment of private benefits such as the use of phones, cars or computers could breach s109 as a relative of the SMSF fund is receiving favourable treatment. Paying lower than market rates for using the services of a family member could result in the fund being taxed at 45% on income, including capital gains, in relation to the business as it could be considered as being non arm’s length income (NALI).
- Giving a charge over business assets – r13.14 prohibits giving a charge over SMSF assets. This could affect business activities and the way the business operates as leasing vehicles and equipment would not be allowable.
Whilst you can use your SMSF to run a business conducted through your SMSF the above SIS rules severely restrict the nature of the business activities and investment decisions.
What are the ATO concerns with the Sole Purpose Test?
Investments by your SMSF must meet the sole purpose test. The sole purpose test requires the SMSF trustees to run the fund for the sole purpose of providing retirement benefits for the members or for their dependants if a member dies before retirement.
Carrying on a business in a SMSF is a red flag to the Australian Taxation Office (ATO). The ATO monitor the business activities closely to ensure compliance with the sole purpose test. The ATO is concerned that the members may have access to their super before they are legally entitled to do so which is generally when they reach the age of 65 or otherwise retire.
The ATO focus on the following:
- employing a family member – are the wages in accordance with the market? is the member receiving other benefits such as a car? what does the family member do and is that reasonable for the position they hold? What is the stated rationale for employing the family member?
- is the business a hobby or pastime?
- is the business linked to related or associated trading entities
- when business assets are available for the private use and benefit of the trustee of the SMSF, the members or any other related parties
The ATO is also concerned that income is being diverted to the superannuation environment to take advantage of concessional tax rates.
Using a SMSF to run a Share Trading Business
Technically you can use super to run a share trading business, but it is subject to all of the rules discussed above. The ATO have identified that running a business would include:
- nature and purpose of activities – preparing a business plan to show the analysis of the market, research and the basis of when to hold or sell shares would be indicative of a business versus the intention of earning income from dividends rather than the sale of shares
- repetition, volume and regularity of trading shares – the higher volume is more indicative of a business
- organisation in a business-like manner and keeping records – the trustees’ qualifications and skills are important indicators
- the amount of capital invested
Many SMSFs trade shares on a daily basis but do not meet the ATOs tests regarding carrying on a business of share trading.
ATO Example: shareholding as an investor
George is an accountant. He has:
bought 200,000 shares in 20 blue chip companies over several years
a total portfolio of $1.5 million.
George bought the shares because of consistently high dividends, although he does invest in a small amount of growth stocks.
George:
monitors his share portfolio daily and analyses daily developments in equity markets using financial newspapers and stock market reports
subscribes to news from online investment analysts.
In the last income year, he sells 20,000 of his shares over a number of occasions for a gain of $50,000. He did not sell his shares unless their price appreciated markedly.
Although George has made a large gain on the sale of shares, and has invested a significant amount of capital, he is not carrying on a business of share trading. He has purchased his shares for the purpose of earning dividend income rather than making a profit from buying and selling shares.
Is it possible to use your SMSF to Buy your Business?
Maybe. Whether a SMSF can buy your business depends on how your business is structured. Assuming it is a company that you control the shares would be in-house assets and a SMSF could acquire the shares. However, the market value of the shares cannot exceed 5% of the total market value of the fund’s assets at the time of purchase and no other in-house assets are owned by the SMSF. Of course, all of the SIS rules discussed above have to be satisfied and the market value of the shares constantly reviewed to ensure the 5% in-house threshold is not exceeded.
Can my SMSF Purchase my Business Premises?
Yes. It is a very common strategy for a fund to buy the property from a member and lease it to a related company or trust. Provided the property is used 100% in your business it falls under one of the in-house asset exemptions and can be acquired by your SMSF. The SMSF must obtain a valuation of the business premises and it can be funded from the fund’s cash and borrowings or possibly partly funded as an in-specie contribution. It is best practice to obtain a formal valuation from a qualified valuer to ensure there are no NALI issues. Other SIS rules must also be considered before proceeding with this strategy.
Professional advice should be obtained from your SMSF Specialist or financial advice from your Licensed Financial Adviser before purchasing your business premises as the SIS rules can be complex in relation to in-house assets, borrowings and in-specie contributions.
Can my Self-Managed Superannuation Fund invest into an Unrelated Trust Carrying on a Business?
Yes, it can. An unrelated trust is not controlled by the members or their related parties. An unrelated trust can operate a business without breaching the SIS rules. An unrelated trust can borrow, without the complexity of using a limited recourse borrowing arrangement and use the assets of the trust as security for a loan. However, the auditor is required to take a look through approach to ascertain if the financials of the trust include any related party transactions which may not be at arm’s length and ensure the fund’s financial statements include the market value of the units after taking into account the underlying assets and liabilities of the trust.
Can my SMSF run a Business through an Ungeared Company or Unit Trust?
No. An ungeared company or trust is prohibited from carrying on a business.
Key Takeaways
- Using a SMSF to carry on a business is prohibitive due to the complex SIS rules
- A SMSF carrying on a business could not have a bank overdraft or margin lending account
- It is possible for the fund to buy your business but in practical terms is not very viable
- Rules governing SMSFs prohibit lending to members and their relatives which can be problematic for a small business
- The ATO are concerned about employing the family members in the SMSF business
- The ATO will examine the activities closely of a SMSF business
- A fund can’t carry on a business through an ungeared unit trust
Do you need help with understanding how your SMSF can run a business?
Give us a call on 1300 392 544 or get in touch online