Using your self-managed super fund to operate a business
Self-managed super funds (SMSFs) may operate a business if it is permitted under the SMSF’s trust deed, and used solely for generating retirement benefits for fund members.
Please be aware that some activities, such as entering into credit arrangements or having overdrafts, are prohibited for SMSFs.
The ATO carefully scrutinises the activities of trustees using an SMSF to operate a business, making sure the “sole purpose test” is not compromised. This means, as stated above, that the sole purpose of your SMSF is providing retirement benefits to your members, or to their dependants if a member dies preceding retirement.
The ATO is interested in any SMSF that: one, employs a family member of a trustee; two, a hobby or pastime is the operational purpose of the business; three, the SMSF’s business is linked to associated trading entities; finally, if the trustee or related parties use the fund's business assets for private use.
Additional regulatory requirements
A business operated by your SMSF must comply with investment rules and restrictions applying to SMSFs. As the fund’s trustee you are obligated to make sure this happens.
Your SMSF's investment strategy – determines the nature of its business activities.
Restrictions on investments – a commercial “arm's length” basis applies to all investments by your SMSF. Breaching these restrictions will probably result in penalties.
Loans and financial assistance – the following are unacceptable for an SMSF’s business activities:
- A member or relative of a member purchasing an asset from the SMSF for less than its market value (and see below for further issues with this approach)
- A member or relative of a member selling an asset to the SMSF for greater than its market value
- The SMSF excessively using services supplied by a member or the relative of a member
- Overpaying a member or relative of a member for services provided to the SMSF
Acquiring assets from related parties – acquisition rules could be contravened by purchasing assets, including plant and equipment, for business activities from a member or other related party.
The SMSF may only purchase assets at market value from a related party and they must be:
- A listed security such as shares, units, or bonds, listed on an approved stock exchange
- Business real property
- Permitted if your SMSF’s in-house assets do not exceed 5% of the total market value of your fund's assets and can be an “in-house asset” (from or to a related party), such as a loan, lease, or investment.
Borrowing – restrictions will be contravened if the SMSF draws on an overdraft or margin lending account. The borrowing and charge-over assets restrictions would be contravened by borrowing money and placing a mortgage on an asset.
Arm's length dealings – the arm's length provisions would be violated by employing a member, or relative of a member, in the SMSF’s business at a salary higher than an arm's length rate.
Collectables and personal use assets owned by the SMSF – it is prohibited from displaying these kinds of assets at the business premises.
Hillyer Riches Management Pty Ltd , accountants and advisors located in Caulfield, is a Corporate Authorised Representative (No 466483) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. AFSL / ACL No. 223135.This document contains general advice only and is not personal financial or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information.
Check out this post about COVID-19 ATO Updates in Australia.