Factors to Consider in Purchasing Equipment for Your Business Through SMSF
People often ask if it’s possible to use the SMSF to buy or lease a plant, equipment, or vehicle for a business run by a member or someone related to them. Technically, this is possible, but practically, it’s not advisable due to the numerous provisions you may violate in the process.
You must satisfy at least these 5 areas stipulated in the Superannuation Industry (Supervision) Act 1993 (SIS) before you can proceed with the lease or purchase of the business-related asset in question:
1) Sole Purpose Test
Any kind of asset that’s to be purchased using SMSF must first pass the Sole Purpose Test. The Sole Purpose Test states that the trustee must ensure the fund is used solely for purposes that will benefit the member upon retirement.
2) SMSF Investment Strategy
Before the fund can be used, an investment strategy must be set out, identifying the fund objectives and the types of investments it can be involved with.
3) Prohibitions in lending the super fund to members
A trustee cannot lend money or provide financial assistance to another fund member or a relative of any member.
4) Arm’s length requirements
The terms and conditions the trustee and the other party agree to must not be more favourable for one party over the other.
The term ‘at arm’s length’ can be subjected to various interpretations. But to make things shorter, just think of the scenario whether a sensible individual who has a personal business interest, would have invested in the asset.
5) In-house asset rule
An in-house asset can be either of the following:
- A loan to a related party
- An investment to a related party or a related trust
- An asset on a lease between the trustee and the related party
Under the in-house asset rule, you can use the super fund to purchase in-house assets with cost not exceeding 5% of the total value of the SMSF.
So, if you plan to purchase equipment that’s worth $20,000, the total value of your SMSF must be at least $400,000 to avoid breaching the rule. If your total fund is less than $400,000 or the cost of the in-house asset to be bought is greater than 5% of the fund’s value, the purchase cannot be executed.
The in-house asset rule must be assessed and met annually. This means that if the super fund is invested in stocks, and the market takes a drop, or cash is taken out of the fund for the pension of a member, there will be changes in the total value of the SMSF. In this scenario, the value of the purchased in-house asset may exceed the 5% limit when everything has been recomputed.
Remember that the in-house asset rule doesn’t supersede other SMSF investment rules. Instead, it must be met with equal importance as the other regulations stated by the law.
To summarize things, you can buy or lease a plant, equipment, or vehicle for your business using SMSF. But it’s not recommended to use SMSF money for this business strategy because of the complications and pitfalls you may face.
If you really plan to proceed, it’s best to consult an SMSF specialist first before taking any actions.