SMSF investment in a private company or business

Self-managed super funds (SMSFs) are allowed to invest a private company or business provided the business is operated for the sole purpose of providing retirement benefits for fund members and it is allowed under the trust deed.

SMSF trustees must take into account the sole purpose test when determining whether purchasing a private company or business is appropriate. The sole purpose test means your fund needs to be maintained for the sole purpose of providing retirement benefits to your members or to their dependants if a member dies before retirement.

Under the sole purpose test, the SMSF is eligible for concessional tax treatment. However, trustees who contravene the sole purpose test (i.e. provide a pre-retirement benefit to someone) could lose the fund’s concessional tax status and trustees could face severe civil and criminal penalties.

When trustees are considering investing in an entity that carries on a business, they must ensure their SMSF complies with their investment strategy, arm’s length transactions and the rules surrounding related parties.

SMSF trustees must ensure they do not cross the line between investing in a business and using their SMSF to run a business. Some indicators that the SMSF has crossed the line include those where:

• the trustee employs a family member

• the ‘business’ is an activity commonly carried out as a hobby or pastime

• the business carried on by the fund has links to associated trading entities

• there are indications the fund’s business assets are available for the private use and benefit of the trustee or related parties.

SMSF’s looking to invest in a private company or business must ensure their SMSF trust deed permits the investment; the SMSF has a written and up-to-date investment strategy and investments are made in line with the strategy.

Trustees must also ensure investments are made and maintained on an arm’s length basis; assets are not acquired from related parties (unless they are an exception) and the transaction does not breach the in-house asset limit.