The question of whether an SMSF can carry on a business can be considered both from an income tax perspective and from a regulatory perspective.
An SMSF may not be permitted by trust law to carry on a business if its trust deed does not empower it to do so.
Can an SMSF carry on a business without contravening the regulatory provisions?
When determining compliance with 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.
However, trustees should be aware that those activities may breach the sole purpose test.
What is the Sole purpose test?
The sole purpose 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 or for the provision of stipulated ancillary purpose benefits.
‘Ancillary purpose’ generally relate to the provision of benefits on the cessation of a member’s employment, and death benefits and approved benefits not specified under the core benefits. A trustee who maintains an SMSF for any other purpose contravenes this provision.
Determining the purpose for which an SMSF is being maintained requires a survey of all the events and circumstances relating to the SMSF’s maintenance.
A trustee must maintain an SMSF in a manner which complies with the sole purpose test at all times. The sole purpose test also applies, without exception, to the purpose for which any activity is undertaken by the trustees.
If the trustee of an SMSF carries on a business, we would examine the activities closely to ensure that the sole purpose test is not breached.
Cases that would attract our attention include those where:
- 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.
Other regulatory provisions
The sole purpose test is complemented by other regulatory provisions. Trustees should be mindful that conducting business activities may contravene one or more of these other regulatory provisions.
A contravention of one or more of those provisions may also indicate that the sole purpose test has been, or could be, breached.
These provisions include:
- An SMSF trustee must formulate and give effect to an investment strategy that has regard to all the circumstances of the SMSF.
For example, the nature of the business activities and the manner in which they are conducted must be in accordance with the investment strategy formulated for the SMSF.
- An 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.
For example, the business activities must not involve selling an SMSF asset for less than its market value to a member or relative of a member, purchasing an asset for greater than its market value from a member or relative of a member, acquiring services in excess of what the SMSF requires from a member or relative of a member, or paying an inflated price for services acquired from a member or relative of a member.
- Subject to specific exceptions, an SMSF trustee is prohibited from acquiring assets from related parties of the SMSF.
For example, the purchasing from a member or other related party of assets (such as plant and equipment) for use in the business activities could be a contravention of the related party acquisition rules.
- 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.
For example, drawing upon a bank overdraft or margin lending account to fund the business activities could be in contravention of the borrowing restrictions. In a further example, borrowing money and allowing a mortgage to be placed on an 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.
Trustees should ensure that all regulatory provisions are complied with at all times. As an SMSF trustee, you are ultimately responsible for running your SMSF. It is important you understand the duties, responsibilities and obligations of being a trustee.
For more information on your roles and responsibilities as an SMSF trustee please contact us.
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