The Australian Taxation Office (ATO) has always taken a “very dim view” to a SMSF wanting to carry on a business, but the law does not prevent a fund from doing so.
Information contained on the ATO website provides an insight to the determining factors and issues as to whether an SMSF can carry on a business. These include consideration from an income tax perspective and also a regulatory perspective.
When determining compliance with the regulatory provisions it is the activities of the trustee that are examined rather than whether a business is being carried on by the SMSF. The fact that activities undertaken by an SMSF trustee are considered business activities for income tax purposes does not necessarily mean that the trustee contravenes the regulatory provisions. Examples of this may include share trading within a SMSF, or investment within an agricultural (or farming) style investment within the fund.
The over-arching issue that is really the ‘acid-test’ for the ATO in carrying on a business within a SMSF is the “sole purpose test”. This test prohibits trustees from maintaining an SMSF for purposes other than for the provision of retirement or death benefits for or in relation to its members (core purpose) or specific ancillary purposes.
To determine ‘sole purpose’, all events and circumstances relating to the SMSF must be considered at the time. It is the trustee’s duty to comply with the sole purpose test at all times. There is no greater severity in superannuation law than to breach the sole purpose test.
- the trustee employs a family member (we would look at, among other things, the stated rationale for employing the family member and the level of salary or wages paid)
- the trustee carries on a business that relates to an activity that is commonly carried out as a hobby or pastime
- the business carried on by the fund has links to associated trading entities
- there are indications that super fund assets are available for the private use and benefit of the trustee or related parties.
In addition to the sole purpose test, there are a range of other regulatory provisions that a SMSF must consider and adhere to when considering conducting a business. These include:
- A SMSF trustee must formulate and give effect to an investment strategy that has regard to all the circumstances of the SMSF.
- A SMSF trustee is prohibited from lending money, or providing any other financial assistance using the resources of the SMSF, to a member of the SMSF or a relative of a member of the SMSF.
- Subject to specific exceptions, an SMSF trustee is prohibited from acquiring assets from related parties of the SMSF.
- Subject to specific exceptions, an SMSF trustee is prohibited from borrowing or maintaining an existing borrowing of money. There are also prohibitions on giving a charge over, or in relation to, an asset of the fund.
- All SMSF investment dealings must be at arm’s length or must be conducted on arm’s length terms and conditions.
For those considering strategies that may constitute conducting a business, it is important that you clearly understand the events, requirements and risks associated with undertaking a particular course of action. Obtaining a private ruling in many cases is a prudent approach.
Further information can be obtained on the ATO website, http://www.ato.gov.au/superfunds/content.asp?doc=/content/00241937.htm&pc=001/149/030/004/005&mnu=49150&mfp=001/149&st=&cy=1