By Monica Rule

I am often asked by clients if it is possible to establish a Self Managed Superannuation Fund (SMSF) and use the SMSF to run a business.    So, with this in mind, I thought I would write this month’s bulletin on whether an SMSF can run a business.

An SMSF can invest in anything as long as it complies with the superannuation law.  One area of the law that relates directly to investment is the “Sole Purpose Test”.  The “Sole Purpose Test” stipulates that the purpose of an SMSF is to provide retirement related income for members or death benefits for the members’ dependants.  Therefore, any investment that provides the members with an immediate “benefit”, to which they are not entitled, would contravene the superannuation law.  

So, would an SMSF running a business, contravene the law?

Yes, it would.  If an SMSF is operating a business to generate non-superannuation income (e.g. salary or wage income) for its members then it is providing an immediate benefit for its members.  In essence the SMSF is funding the day-to-day financial needs of its members and, therefore, it is not established to provide retirement benefits for its members. An SMSF cannot directly run a business.       

On the other hand, the superannuation law does allow an SMSF to invest in an entity that carries on a business.  You can see that there is a fine line between investing in a business and using the SMSF to run a business. 

For example, if an SMSF is generating non-superannuation income (e.g. employment income) for its members then it is operating a business.  Whereas, if it has purchased shares in a company to generate investment income for its members’ retirement, and not to provide a “current day” benefit, then it is acceptable as it is seen as a normal investment.

Therefore, if an SMSF member operates a business under either a company structure or a trust structure, their SMSF would be able to invest in the company or the trust entity. However, the superannuation law does restrict related party investments to five per cent (5%) of the total value of the assets in the SMSF. For example, if an SMSF’s assets are valued at $500,000, then the SMSF can invest up to $25,000 (i.e. 5%) in a member’s company which carries on a business. 

However, if the member’s business is operated under an “unrelated” company structure where they own 50% or less of the company, then their SMSF is not restricted in how much it can invest.  The member will need to make sure that they do not have any control over the company.  This is because under the superannuation law a company that is sufficiently influenced by, or in which a majority voting interest is held by, the SMSF member and/or their Part 8 Associates (i.e. relatives & business partners) is treated as a related entity. This is where the SMSF member and/or their Part 8 associates are in a position to cast, control the casting vote, or have more than 50% of the maximum number of votes at the annual general meeting of that company.

Also, if an SMSF member decides to establish their business under an “unrelated” trust structure, then they will need to make sure they do not have any control over the trust.  An SMSF member controls a trust if they and/or their Part 8 Associates have a fixed entitlement to more than 50% of the capital of the trust, or they are able to direct the trustee to act in accordance with their wishes or are able to appoint or remove the trustee.

I do have to warn you that if you are thinking of establishing an “unrelated” entity with other people, it needs to be genuine and you do not control the entity.  An audit conducted by the ATO in 2011/2012, where an SMSF member (Mr Ali) established an unrelated company with another person, found that the co-director was only appointed to create an appearance of independence and did not have any input into the management of the company. As a result the investment by the SMSF into the company was found to contravene the superannuation law. If you are interested in learning more about this case, the Administrative Appeals Tribunal reference is The Trustee for R Ali Superannuation Fund and Commissioner of Taxation [2012] AATA 44 (30/1/2012).

Gold and Platinum Members please read on for examples of how your SMSF can assist with your business.

Monica Rule specialises in providing advice on SMSF compliance to professionals and trustees. www.monicarule.com.au

“Disclaimer: The content of this Bulletin is general information only. It is not legal advice. The statements and opinions are the expression of the author, not Law Central, and have not been checked for their accuracy, completeness or changes in the law. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin. ”

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