Help understanding SMSF

Hi all,

New to this forum but hoping someone can help me understand something.

If we were to start a SMSF, are we able to purchase a business (not freehold) through our fund? I see a lot of info about purchasing commercial buildings but none about businesses where you do not purchase the structure but only purchase the business and need to pay rent.

I would also like to know, if the above is possible, am I able to run the business or do I need to sub lease to someone?

Sorry to be such a dummy - this is so confusing to me.

Would also like recommendations for a financial adviser in the Hoppers Crossing area in Melbourne. I need someone that can explain these concepts to us in lay man terms.

Cheers and thanks in advance.

Kind Regards, Leebee1

 

A SMSF exists for one reason only and that is to provide for the retirement of its members. This is known as the 'sole purpose test'. If a fund breaches this it may end up becoming non-complying.

With a business all you are usually buying is good will, and maybe a bit of equipment. If the business fails for whatever reason then the fund will be lost. Statistics show a huge number of businesses fail. So, generally I woud think a SMSF could not own or run a small business.

It may be possible if it was something like a McDonald's franchise though.

 

Thanks very much for the reply. Do you know this to be the case or is this just your thoughts?

I would have thought that a business, if purchased for less than what it is worth would be a great way to boost your SMSF with huge opportunities to increase takings.

I already own an online business but would like to purchase an established shop to incorporate our products. We are looking at a Milk Bar that is a little run down and we know that it has the capacity to increase its own sales - then with our own products added has the capacity to increase sales further. We sell gourmet chocolates and gifts and the shop we would like to look at is in a coastal area with a good all year round population.

Cheers, Leebee

 

May SMSFs carry on business?

Hi

You generally can’t purchase or run a business within a SMSF as it is seen as a breach of the sole purpose test and even if covered in your investment strategy could also breach the in-house assets test as well.

The sole purpose test prohibits trustees from maintaining an SMSF for purposes other than for the provision of retirement or death benefits for or in relation to its members.

In the ATO publication “Running a self-managed super fund – Your role and responsibilities as a trustee” the ATO states “Money belonging to your SMSF can’t be used for personal or business purpose under any circumstances”.

Before considering doing so I suggest you read the following from the ATO:

Carrying on a business in a self-managed superannuation fund

 

These are just my opinions. There is nothing, as far as I know, if the relevant legislation that prevents a SMSF from running a business, but it would be caught up in the general requirements that a Trustee formulate an investment strategy and consider risk.

I don't think a milk bar would be a suitable investment for a SMSF.

The SMSF would also have to employ you, so you run the added risk of claims of benefiting from your fund before retirement.

Also you must look at the trust deed and see if it excludes the fund running a business.

The ATO has also addressed the issue of owning a business in a SMSF and if you do a search you should find something.

 

Thank you for the posts Mike and Terry.

I have read the ruling and as this business would be purchased solely with retirement funds in mind, is the reason I asked the question.

Let me explain our situation a little more. It is my friend that would be purchasing the business through their newly established SMSF. I would be employed in the business by him. I would not be a trustee.

This really is a way to increase his super holdings as he knows the shop in question will increase profits quite fast, and when he sells, the profits would be put into Super.

If you are saying it cannot be done I will take your word for it as I am not very good with this stuff.

Cheers to you both!

 

Hi leebie1
This can be done, but it would have to be set up and maintained carefully to withstand the scrutiny of the ATO. One thing they would be looking for would be whether in reality your friend's SMSF was being used to benefit you personally - this might occur if for example, there was an implication of a partnership in the business between you and your friend.
The situation is a typical one where some legal advice before the arrangements are finalised would be advisable.

 

Thanks for the reply Jorgon,

I can say that in no way would I benefit from the arrangement - other than to manage the shop and be paid for it - I have my own super fund so not looking to benefit from this arrangement - other than to draw a wage and maybe sell my own products in the store to help it flourish.

Would he be able to help in the shop at all do you know?

Can you suggest someone in Melbourne that he should talk to?

He is thinking of setting up his fund with eSuperfund but will need a good adviser by the sounds of things!

Cheers, Leebee1

 

You are prudently thinking of the possible variations in advance which could cause the scheme to go wrong.

I would suggest you and your friend write down how you see it working, then get legal advice on whether this would work using an SMSF as owner of the business or if some other arrangement ought to be used instead. Then you and your friend and the SMSF must strictly adhere to the plan.

You also need to have the fund's investment strategy checked to ensure that the SMSF's investment would be in accordance with it (this is checked in the annual audit). The arguments within the investment strategy about making an investment of this sort will need to make sense in the light of the future needs of the SMSF's member in retirement, the time before which this will occur, the member's other source of income, contributions and the member's other investments available to provide for financial needs in retirement etc.

Also the fund's trust deed must permit the SMSF to make the type of investment involved, otherwise the scheme will fail at the first hurdle.

 

are you a lawyer Jargon?

 

Yes. Only lawyers are permitted to offer legal advice in Australia!

 

I did not mean to question you and sorry if it came across this way! I was merely asking for selfish reasons - thinking maybe you could assist us. Do you do this type of business and if so, what would your fees be?

Thanks again for helping answer these difficult questions.