Self-managed super funds (SMSFs) are not prohibited from carrying on a business, but the business must be:

• allowed under the trust deed
• operated for the sole purpose of providing retirement benefits for fund members.

The rules governing SMSFs prohibit or limit some activities available to other businesses, such as entering into credit arrangements or having overdrafts. You should get professional advice before carrying on a business through your SMSF.

Sole purpose test

If the trustee of an SMSF carries on a business, the ATO examines the activities closely to ensure the sole purpose test isn’t breached. Cases that attract their attention include those where:

• the trustee employs a family member (they look at things such as, the stated rationale for employing the family member and the salary or wages paid)
• 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.

Other regulatory provisions

As a trustee, ensure a business conducted through your SMSF complies with investment rules and restrictions applying to SMSFs.

Your investment strategy – the nature of the business activities and the way they are conducted must be in accordance with the SMSF's investment strategy.

Restrictions on investments – all investments by your SMSF must be made on a commercial arm's length basis. If you don't comply with the investment restrictions, penalties could apply.

Loans and financial assistance – the business activities must not involve:

• lending money to a member or relative of a member
• selling an SMSF asset for less than its market value to a member or relative of a member
• purchasing an asset for greater than its market value from a member or relative of a member
• acquiring services in excess of what the SMSF requires from a member or relative of a member
• paying an inflated price for services acquired from a member or relative of a member.

Acquiring assets from related parties – purchasing assets (such as plant and equipment) for use in business activities from a member or other related party could fail to meet the related party acquisition rules.

Borrowing – drawing on a bank overdraft or margin lending account to fund the business activities could breach the borrowing restrictions. Borrowing money or placing a mortgage on an existing fund asset would fail to meet the borrowing and charge-over assets restrictions.

Arm's length dealings – employing a member, or relative of a member, in the business at a salary higher than an arm's length rate is likely to fail the arm's length provisions.

Collectables and personal use assets – these type of assets owned by the SMSF can't be displayed at the business premises.

Take the time to work with professional advisers if you are unsure how to set up and run a business through an SMSF.