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Can an SMSF run a business?

I am often asked whether an SMSF can run a business. The usual reason for this question is not because the SMSF trustees are thinking of starting a conventional business, but because they are attracted to their SMSF running a share trading business. I’ll explain why later.

While the superannuation law does not specifically disallow an SMSF from conducting a business, the activities of the SMSF trustee must not contravene super law provisions, including:

  • The sole purpose test. The purpose of an SMSF is to provide retirement benefits or retirement related benefits for its members and their dependants. So, if an SMSF is conducting a business, it could be perceived that the money in the fund is being used to provide a current-day benefit to its members instead of it being there for their retirement.
  • Investment strategy. An SMSF trustee must formulate and give effect to an investment strategy. This means the nature of the business activities and the manner in which they are conducted must be in accordance with the investment strategy of the SMSF.
  • Lending. An SMSF trustee is prohibited from lending money or providing financial assistance to members and relatives. Therefore, the business activities must not involve selling an asset of the SMSF for less than its market value; purchasing an asset for greater than its market value; acquiring services in excess of what is required; or paying an inflated price for services acquired from members or relatives.
  • Borrowing. An SMSF must not draw upon a bank overdraft or margin lending product to fund its business activities nor can it borrow money for the business by taking out a mortgage over the SMSF’s assets.
  • Arm’s length investments. An SMSF must not employ a member or a relative in the business at a salary higher than the going rate.

Of course, many of these contraventions now come with steep penalties imposed by the regulator.

A share trading business in an SMSF

If a person is an ordinary share holder then the cost of purchasing shares is not an allowable deduction, and the losses from sales of shares cannot be offset against the income of the SMSF but is instead offset against capital gains received from the sale of those shares. On the other hand if a person is a share trader, they can treat the shares as trading stock and claim deductions for costs incurred in buying and selling shares.

The Australian Taxation Office will determine which category a person belongs to on a case-by-case basis. The general rule is that a share trader is classed as someone who is undertaking business activities for the purpose of earning an income from buying and selling shares. It is the volume and frequency of transactions that is important and not necessarily the amount of capital invested. Other important factors would include things such as evidence of a business plan and keeping records in a business-like manner.

Nevertheless, what people need to be aware of is that a law was introduced in June 2012 that abolished trading stock exceptions for SMSFs. This law limits the ability of SMSFs to pass gains and losses from certain assets (e.g. shares, units, land) through the revenue account. Gains and losses are treated in accordance with the capital gains tax provisions. However, if an SMSF did hold assets as trading stock prior to 10 May 2011 then it can continue to be taxed on revenue account.

So whether an SMSF is conducting a share trading business or not, all share trading activities of the SMSF will now be treated as an investment and the capital gains tax provisions will apply. If you were thinking of a share trading business solely as a way of avoiding capital gains tax then you will need to rethink your plans.

 

Monica Rule worked for the ATO for 28 years and is the author of the book titled “The Self Managed Super Handbook – Superannuation Law for Self Managed Super Funds in plain English” www.monicarule.com.au

 

5 Comments
ian fanning mipa
March 07, 2015

The super legislation does not ban the running of a business. The sole purpose test would still need to be met. A simple way to run a cattle operation would be to have the Superfund own the land and charge agistment at market rates to the usual operating entity.

Peter Munns
December 12, 2022

Would it be possible on the other hand for the SMSF to own the cattle and related infrastructure, and pay agistment at market rates to the land owner (who is also a trustee / member)?

I don't see an issue if all the tests are met. I simply want to utilise the capital in my super fund to own a grazing operation. I am not driven to borrow, seek high rents or seek a massive salary. I am happy to not even pay myself from the grazing operation. It will make money by buying and fattening cattle (and sheep) on the grass on my farm, and sell them to market. Also some breeding.

Scoota
October 30, 2015

Can our SMSF purchase a business and we run it without drawing a wage (all profit after running ocsts to go inot the smsf)?

Shawn
January 09, 2023

Peter Munns, I'm pretty sure that your proposed scheme would be a violation of the sole purpose test. Firstly, the fund would not be able to pay rates to the landowner, if the landowner is a trustee/member. This would violate the sole purpose test because benefits are being conferred to the member before retirement in the form of the rates.

Also, even if the land was not owned by the member, it would likely still violate the sole purpose test in that you are running a business, and the business provides you with some benefits. For example, it could be argued that you're achieving employment through the operation, paid or not.

The other issue has to do with "non-arms length income and expenditure" or NALI and NALE. You would be providing your services as a grazer to the fund. The ATO views this as the fund basically receiving freebies, which is a way to contravene the rules about contributions to super.

However, do check with your accountant of course before making a decision.

 

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