Self-managed super funds and operating a business

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One of the questions I often get asked by clients who own businesses or intend to buy a business is – Can I buy or operate my business in or through my Self-managed superannuation fund (SMSF)? Below I will run through key information regarding SMSF’s and operating a business.

What is an Self-managed Superannuation Fund (SMSF)?

Basically, a SMSF is a super fund which:

  • does not have more than six (6) members
  • does not have professional trustees
  • is run and managed by the members of the fund

It is not a commercial or retail fund.

In an SMSF you each member is the trustee or you can set up a company to act as a legal trustee.

An SMSF gives you the flexibility to manage your own superannuation and set your own investment goals whilst preparing for retirement. Whilst having control over your own superannuation is appealing, it comes with responsibility, risk and hard work.

One of the most important aspects of any SMSF is to ensure the trust deed is compliant with the relevant legislation including the Superannuation Industry (Supervision) Act 1993, Income Tax Assessment Act 1997, Corporations Act 2001 and relevant common law as to the duty of trustees etc.

The advantages and disadvantages of an SMSF

Before setting up a SMSF you must consider whether it is worth your time and effort to do so. There are both advantages and disadvantages and that is why it is essential to get professional advice form your trusted legal and financial advisors.

The advantages are:

  • control
  • costs
  • quick decision making

The disadvantages are:

  • financial and legal risks when making decisions
  • no access to government compensation schemes and reduced dispute resolution processes
  • time consuming

Whilst costs can be a positive it also is costly to set up an SMSF and there are ongoing costs such as:

  • accounting
  • audit
  • insurance
  • legal

SMSF and your business

A SMSF is allowed to carry on a business but that business must be:

  • Permitted pursuant to the trust deed; and
  • operated for the sole purpose of providing benefits for fund members for their retirement.

The Australian Taxation Office (ATO) closely regulates the activities an SMSF can undertake particularly when it comes to a business.

What is the “sole purpose test”?

Basically the sole purpose test ensures that the SMSF is maintained only for the sole purpose of providing benefits to the members or in the case where a member dies before retirement to their dependents.

The ATO looks at such things as:

  • is the trustee employing a family member – what is the reason for this and what are they paid?
  • are there links to associated entities?
  • are the SMSFs asset available for the private use of the trustee or any related parties?
  • Is the business carrying on an activity which could be a hobby or pastime?

In particular the ATO will also consider whether there is compliance with the relevant legislation and will look at:

  • the investment strategy
  • whether the investments are made on a commercial and arm’s length basis
  • the commerciality of any loans and financial assistance, both given and received
  • assets which are acquired from any related entity
  • the nature of any borrowings or mortgages over assets contravening legislation   
  • collectables and personal use assets displayed at the business

The ATO has significant information as to these issues on its website available here.

How can FC Lawyers help?

At FC Lawyers we have been assisting clients with their business needs for nearly 30 years. Our experienced business and commercial team have advised business clients both large and small in relation to all their business and SMSF needs including formation, regulation, and compliance.

Contact our team today to discuss your options with SMSF’s and operating a business.

The information provided in this article is for general information and educative purposes in summary form on legal topics which is current at the time it is published. The content does not constitute legal advice or recommendations and should not be relied upon as such. Whilst every care has been taken in the preparation of this article, FC Lawyers cannot accept responsibility for any errors, including those caused by negligence, in the material. We make no representations, statements or warranties about the accuracy or completeness of the information and you should not rely on it. You are advised to make your own independent inquiries regarding the accuracy of any information provided on this website. FC Lawyers does not guarantee, and accepts no legal responsibility whatsoever arising from or in connection to the accuracy, reliability, currency, correctness or completeness of any material contained in this article. Links to third party websites or articles does not constitute any endorsement or approval of those sites or the owners of those sites. Nothing in this article should be construed as granting any licence or right for you to use that content. You should consult the third party’s terms and conditions of use in relation to any third-party content. FC Lawyers disclaims all responsibility and all liability (including liability for negligence) for all expenses, losses, damages and costs you might incur as a result of the information being inaccurate or incomplete in any way. Appropriate legal advice should always be obtained in actual situations.

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