Things you can’t buy or do

A non exhaustive list of things you can’t buy or do are:

• You can’t borrow, from the bank, or a related party (s67), unless the <excepted borrowing rules apply> (s67A,67B). The ATO considers unpaid distributions from unit trusts will meet the extended definition of a loan, to read more see <investments in unit trusts from non borrowed funds>.
• can’t loan money to a member (which includes a relative) of the super fund (s65)
• Can’t provide a guarantee for the benefit of a member (s66)
• Can’t give a loan or guarantee to a related party (associate) of a member, (s66).
• Can’t purchase of a <collectable that does not meet the rules> (S62A).
• Can’t buy investments from a member except for pursuant to s66:

  Related Party Aquisitions Exemptions:

  1. Shares/Security Listed – on the stock market and
  2. Business Real Property – used wholly and exclusively in business (not your business). Business real property specifically includes real estate used in one or more ‘primary production business (as defined in ITAA97) where a portion of the property (not exceeding two hectares) contains a dwelling that is used primarily for domestic or private purposes. 
  3. In House Asset – An investment is an in-house asset if it is an asset in/of a related party and does not represent more than 5% of the fund. An In-house asset can be:  (1) a loan, (2) a investment in a unit trust, company or any other interest in a related party, or (3) a financial/lease arrangement with a related party. Relevant sections are s69-s85, see what the ATO has to say about in house assets <ATO-Link>. Accordingly the SMSF cannot purchase from a related party in excess of 5% <Reg13.22c>.
  4. Merger between SMSF’s
  5. Relationship breakdown
  6. Transitional Rules S66(2A)(a)(ii) & 66(2A)(b)
  7. Life Insurance Policy at market value
  8. Certain assets (eg investments in <non geared unit trusts> or companies).

• Can’t carry on a business. 

Activities that constitute the carrying on of a business for income tax purposes does not represent a contravention of the SIS provisions. However the ATO has made statements advising it does not want SMSF’s carrying on a business due to the potential of such activities breaching the <sole purpose test> and thus the provisions of the SIS Act. Nevertheless it does accept for example that activities of a property development nature do not necessarily contravene the sole purpose test for example, which can be argued as the carrying on of a business for income tax purposes. Here’s what the ATO has to say <ATO-Link>. More on property development activities <click here>.

• Can’t buy investments when not ‘dealing’ at arms length, (s109). 

Section 109 of the Superannuation Industry (Supervision) Act (SIS Act) requires that SMSF
investment transactions must be entered into and maintained on an arm’s length basis.  There requirement to be ‘dealing’ at ‘arms length’ with your SMSF is an important part of superannuation law to ensure prevention of transactions that may allow fund assets to be used as a source of concessionally taxed benefits to members in pre-retirement years, or to advantage non-members. A transfer of assets at less than market value can have unintended consequences for the vendor and the buyer, for example potentially affect contribution caps and excess contributions tax determinations. To assist you in determining market values, Super Circular <SC2003/1> provides guidance for SMSFs relating to steps for the appropriate determination of market values for particular fund investments, including property. Not dealing at arm’s length can also cause issues for the breaching the <sole purpose test>. Here’s what the ATO has to say <ATO-Link>.

What is not considered to be a breach of s109 (or is unclear whether it is a breach):

• Interest Free Loan from a Related Party resulting in a saving to the SMSF is unlikely to breach the sole purpose test as it increases the funds capacity to provide for retirement, however in considering s109 a key requirement that must be satisfied is:
• the income derived by the fund must be more than the amount that would have been received if the parties had been dealing at arms length – this presents a risk as there are arguments on both sides. For example if we assume the loaned funds were used to purchase a property – the ATO may consider that the loan would not have been provided if the loan had normal commercial interest rates apply and therefore no rental income from a property would have been received thus satisifying the requirement and thus breaching s109. The SMSF Trustees may argue that the loan would have been entered into the loan regardless of the normal commercial  interest rate applying as the trustees reasons for acquiring property was based on the trustees objective to invest in direct property due to investment objectives of the members and increasing capacity to provide for retirement. Other arguments may arise also. Tip – If you do use a interest free loan, produce documentation for reasons for acquiring the investment funded by the interest free loan with a view of substantiating your position and clearly demonstrating the intentions and reasons for the acquisition.     
• Free Labour provided by a related party resulting in a saving to the SMSF is acceptable