There’s no law that says it can’t be done. What often happens is that other super laws get in the way and make an SMSF a difficult entity for running a business.

First and foremost is the sole purpose test, which is the guiding light that applies to everything an SMSF does. That test requires that the fund must operate solely for the purposes of providing for the members’ retirement or to support their families if they die. Businesses are set up and run for many reasons and it won’t always be obvious that the sole purpose test lies at the heart of all decisions the trustee (as the business owner) makes.

And the sole purpose test will touch business decisions in all sorts of ways.

For example, auditors and the ATO (as the regulator of all SMSFs) will delve into issues such as: if there are family members involved in the business, are they really needed? Are they worth their salaries? Are they employed because they’re the best candidates for the job or because mum and dad want to provide employment for a wayward son? And is the business really doing something likely to enhance the members’ retirement savings or just indulging a hobby?

And when family are involved, remunerating them is tricky. They can’t be paid too much or too little.

For example, paying family members too much would risk a sole purpose test breach or even break another rule: providing financial support to a member or their family.

But paying too little raises a potential tax problem. If the SMSF makes too much profit because the (family) employees aren’t being paid properly, its income might be deemed “non arm’s length income” and taxed at the highest marginal rate.

It’s common for businesses to borrow, even if it’s just an occasional bank overdraft or credit card. An SMSF has nowhere near the freedom here that another entity could provide. SMSFs can borrow but only under a limited recourse borrowing arrangement (i.e., to buy a specific asset under very particular rules). They couldn’t have a bank overdraft and it would be incredibly difficult in practice to borrow to buy another business even if that was a great opportunity commercially.

SMSFs are strictly prohibited from lending money to members and their family. So a practice that might be relatively normal in a small business (occasional loans to the business owners) would be a clear no.

SMSFs are also unable to allow a charge over an asset. That means being careful to make sure any contracts entered into (e.g. leasing, development of property) do not result in a charge being placed over fund assets.

And what if the business got sued or went bankrupt? This could be a double whammy as the members could lose their jobs and their retirement savings all in one go. In fact, that raises another important superannuation requirement. Trustees of superannuation funds are required to exercise “the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with the property of another person for whom the person felt morally bound to provide”. I suspect many decisions in small business are inherently riskier than this requirement would imply!

The one time it does sometimes come up in practice is when SMSF trustees wonder whether their share trading activities are sufficient to describe themselves as running a share trading business.

As a general rule, even very active SMSF investors are not in fact running a business. This would require them to meet the normal ATO tests associated with business activities – for example, the volume of operations, number of people involved, whether specific licences or premises are obtained and more. Simply trading shares every day in order to maximise the fund’s returns wouldn’t automatically result in the SMSF being classified as a business.

So technically, an SMSF could certainly run a business as long as its investment strategy and trust deed permitted it and all the various rules were followed. But in practice, it’s no surprise that it’s very rarely, if ever, done.