By: Alexandra Cain
Money contributor Melissa Browne. Photo: supplied
The short answer is yes. The long answer is more complex.
For a lot of people, putting their business premises inside their super fund makes sense. But what about putting the business itself inside a self-managed super fund?
I put this question to Melissa Browne, founder of accounting practice Accounting and Taxation Advantage, and author of More Money for Shoes and Fabulous but Broke. She says it is possible in theory, but not really in practice, with a few exceptions.
“A lot of businesses might be attracted to that if they have cash in their super fund to buy the business. The profit on a business in a super fund may be taxed at 15¢ in the dollar, so that’s really attractive. And the ATO say you can, so there’s three big ticks,” says Browne.
“But the problem is that a self-managed super fund has to meet the sole purpose test. There are many instances where you’re likely to breach that test if you run a small business inside a super fund,” she argues. The sole purpose test means an SMSF must be run only to provide members with retirement funds.
There is a huge number of ways running a business inside an SMSF could breach the sole purpose test. For instance, if the business employs a family member without paying a market-rate wage the ATO could take the view the fund has provided an in-house asset, which could breach the Superannuation Industry (Supervision) Act 1993. In-house assets are like loans from an SMSF to a related party and cannot be more than 5 per cent of the fund’s assets.
The ATO may take a dim view of the SMSF holding the business if it is a hobby business. It would also be difficult for the business to have an overdraft given the strict rules around SMSFs and borrowing. The business would likely be unable to lend money to related parties of the fund, another common small business practice if one of the founders, say, needs a short-term loan.
Providing phones or computers to staff members might be questionable given that doing so could prevent the fund from meeting the sole purpose test, given it would be spending money on expenses that were not related to providing retirement benefits to fund members. Even leasing property for business premises could be problematic.
So running most businesses through a super fund would be a hassle and Browne says she’s never seen a client do it. But she says there are a couple of ways when it could make sense.
The first is property development businesses, with the fund owning the real estate assets and ensuring it stays inside the lending rules around SMSFs. It might also be possible for an SMSF to own a franchise, potentially if the members had nothing to do with the franchise except provide money to invest in it. Browne says the most common example she sees is SMSFs providing start-up capital to early-stage ventures.
It’s worth noting it’s unlikely that it would be possible for the fund to own a business of any decent size given the proposed $1.6 million cap on contributions to the super environment.
So while there is some scope for an SMSF to own an interest in its members’ businesses, in most cases actually doing it is impractical.
Source: Sydney Morning Herald
