There is no dearth of Small and Medium Enterprise (SME) owners who want to run their business from the proceeds of their SMSF. Some of them have made a valiant bid, too, but the idea is mired in impracticality. There is no denying this! If you are a fund trustee, here are a few questions you must ask yourself prior to using your SMSF to run a business.
Questions every SMSF trustee should be ready to answer
- Does your ambition comply with the Sole Purpose Test that says SMSF should be used for the purpose of retirement and nothing else?
- Can the business in question be the part of your investment strategy because if it can’t be that way, you will only be inviting penalties from the ATO? Equally significant is to check whether the business aspiration can be implemented without disregarding the trust deed.
- An SMSF cannot lend to members. Arm’s length transactions can be carried commercially but all other transactions are deemed illegitimate. This brings up a crucial concern — how is the business expected to pay for the trading stocks?
- If the business seeks frequent overdrafts, it is difficult to get aid from SMSFs which have very stringent borrowing rules in place?
It is not difficult to decipher that it is mighty hard to keep the law men pleased and yet carry a business, aided by your SMSF.