Can you use your SMSF to run or fund a business? The answer is a mixture of yes and no because there are many prohibitions and overlapping laws that make it extremely difficult to do.

Quick Overview

You can basically invest your SMSF in anything as long as it follows the rules supplied in the superannuation law. The law states that an SMSF’s purpose is to provide income upon retirement or benefits to the member’s dependents upon the member’s death. Any use of the fund that immediately benefits the member, to which they’re ineligible to receive, contradicts the purpose of the superannuation law.

Restricted Circumstances

In this context, there’s a huge difference between the definition of ‘investment’ and ‘operation’. An SMSF member cannot use their funds to directly run or operate a business per se, but it can be used to invest in a certain portion of a business.

Directly using the funds, similar to how an individual borrows money from banks, contravenes the superannuation law. This means the fund can’t run a business that generates income or salary to pay the daily expenses of its member. This occurrence also defeats the Sole Purpose Test.

The Sole Purpose Test is a set of guidelines the Australian Tax Office (ATO) refers to in determining if members who pursued to use their SMSF to invest in a business do not violate the super law. Here are some cases that attract the attention of the ATO:

• When a family member is employed, the ATO looks at the rationale behind the employment and the salary paid to said employee
• The business is run as some sort of hobby of the trustee
• The business is involved with trading entities
• The business assets can be privately used for the benefit of the trustee and all related parties

Permitted Situations

So which situations allow a member to use their super in running a business? The super law allows it if the fund is used to participate in entities like stocks, bonds, and similar investment vehicles. Profits generated from these entities simply increase the member’s retirement fund and is seen as a normal form of investment.

Any SMSF member can still invest in a company or trust structure they’re operating. The super law, however, limits the investment to 5% of the total value of assets under the member’s SMSF. This means that if a member’s SMSF assets have a valuation of $200,000, they can only put up to $10,000 in their own company.

Still, there’s a way to put more than 5% of your SMSF in a business. If you’re investing in an unrelated entity, meaning you’re putting your money in a business wherein there’s no related party involved in it, there’s no restriction in how much a member can invest in the said business. The Superannuation Industry Supervision Act of 1993 (SIS Act) describes a related party as:

• The SMSF member themselves
• An employer involved in an employer-sponsor relationship with the SMSF member
• Part 8 Associate of the SMSF member

The first one means you can’t be part of the business yourself (e.g. co-owner). The second one pertains to a relationship wherein the employer contributes to the invested member’s SMSF. The third one is much more complicated and is better tackled in a separate discussion.

Other Regulations to Follow

Aside from complying with Sole Purpose Test, you must observe the following provisions in investing your SMSF on a business:

• Investment strategy
• investment restrictions
• Loans and financial assistance
• Acquisition of assets
• Borrowing restrictions
• Arm’s length agreements
• Personal use of assets

Failure to comply with any of these regulations breaches the superannuation law and will only bring you unnecessary headaches.

Conclusion

The number of hurdles you have to overcome to be able to use your SMSF to invest in a business will make you think twice if everything is worth the effort and hassle. However, if you’re confident with your business idea and you’re confident that you’ll pass all of the compliance tests, this is a good chance to exponentially increase your retirement funds. It’s still best to seek professional advice if you insist on pushing through this investment option.