“If your fund and your investment strategy allows you to run a business, then you potentially can make that decision,” he said in a recent webinar.

“But the ATO very clearly says that if you are going to run a business in your SMSF, it is going to look at it and everything that's going on from who you are employing, whether they are family members, whether they were the right person for the job, are you paying them market rate?”

Ellem also said the ATO will investigate whether it is the kind of business that an individual would normally run or whether it would be possibly a hobby or pastime, as well as whether an individual is conducting a similar type of business outside of the fund.

“The ATO would question why you are doing this in your fund if you already had a business structure that allows you to do that,” he said.

“In addition to that, on the ATO website under QC 42474, are details and a list of other areas that looks at things such as borrowing.”

Ellem said although legally a fund can run a business, whether it should is questionable and gave an example of Darren, a 46-year-old pharmacist living in Victoria with his wife and daughter where he worked in a large chain of pharmacies.

Darren moved to regional Queensland and decided to establish his pharmacy in the town to which he moved, believing as there was only one other pharmacy in the town he could set up in competition.

“He comes to you and says ‘I want to start up a pharmacy in the town and based on my skills and my knowledge, I believe I can go toe-to-toe with them’. He’s identified a vacant shop on the main street. It will cost $350,000 to buy the building and another $80,000 to set it up, but he doesn’t have the capital and can’t get a bank loan,” Ellem said.

“However, Darren says between himself and his wife they have more than enough money in super if they roll over benefits to an SMSF. They can then purchase the property and can lease it to themselves, making sure they pay commercial rent.”

Ellem said the thing to consider in this scenario is the driving force behind the decisions. Firstly, an adviser should be looking at in-house assets and business real property as well as the lease arrangement which needs to be on commercial terms.

“Darren has already suggested that he would charge commercial rate, so there is probably no problem there, but from an ATO point of view, it will be thinking the only reason Darren set up his SMSF was to purchase the property because he couldn’t afford to do it in his own right,” Ellem said.

“As the trustee you have to go back to the covenants and make decisions as a prudent person would and consider whether the fact that the banks won't lend to you raises red flags and whether this is a good investment for the trustees to get involved in?”

Ellem continued that in this instance, it’s important to consider whether Darren is looking to make this investment in his super fund because it's going to help him set up his business or is looking to make this investment because he believes that this is a good investment for his fund, which is going to benefit the beneficiaries in retirement.

“It comes back to the driving force of the sole purpose test,” Ellem said.

“You have to look at the endgame and what is the likelihood of being able to sell that property when you look to retire or if you have to pay a death benefit? Can the asset be liquidated readily? Does the investment strategy consider diversification?

“These are the kinds of questions the ATO will look at if it comes to their attention.”