Plant or Equipment in an SMSF?
I get this question on Plant and Equipment financing regularly from business clients with an SMSF. The technical answer is yes subject to complying with the regulatory provisions of SIS Act. In reality for most businesses the answer is most likely NO as there are so many ways you can breach one or more of the rules governing this area. Let’s look at some of those rules.
Firstly it is a requirement that a SMSF and any assets it considers purchasing must meet the Sole Purpose Test.
Sole purpose test
• Section 62: trustee must ensure fund is maintained solely for core purposes, such as benefits to members upon retirement and ancillary purposes
Other relevant issues include:
Formulating Investment Strategy
Section 52: trustee must formulate and give effect to investment strategy that has regard to whole of circumstances including:
• risk involved in making, holding and realising, and likely return from investments having regard to objectives and expected cash flow requirements
Lending to members, relatives and financial assistance:
Section 65: A trustee must not lend fund money or provide financial assistance to:
• member of fund OR relative of a member
• ‘Financial assistance’ has no technical meaning and their frame of reference is language of ordinary commerce … one must examine commercial realities of transaction and decide whether it can properly be described as giving of financial assistance (Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1, 10)
In-house asset rules:
An In-house asset is:
• loan to ‘related party’
• investment in ‘related party’
• investment in a ‘related trust’
• asset subject to lease between trustee and a related party (this is the one that matters in your case)
However a SMSF can have up to 5% of fund’s assets in invested “in-house” assets without breaching the rule so if the equipment’s value were less than 5% of the funds total value then you would not be in breach of this rule….but remember the other rules hold equal importance. Also it is important that this rule is met on an ongoing basis so if stock markets drop or cash is taken out of the fund for pensions you need to revisit the value of the in-house asset.
Arm’s length requirements:
Section 109(1): A trustee must not invest unless:
• the trustee and the other party are dealing with each other at arm’s length OR
the terms and conditions are no more favourable to the other party than if they were at arm’s length
• Section 109(1A): If trustee invests and is required to deal with investment with another party not at arm’s length, must deal as if were at arm’s length
• The term ‘at arm’s length’ is not defined in the SIS Act so open to interpretation
• implies dealing that is carried out on commercial terms again subject to interpretation
• useful test to apply is whether prudent person, acting with due regard to own commercial interests, would have made the investment (APRA v Derstepanian (2005) 60 ATR 518, 524)
So example of how this works:
Let’s say you have $600,000 in your SMSF and you want to purchase an excavator for $25,000 to lease to your own business.
- The SMSF Trustees do their research and minuted how they calculate a lease rate that takes into account market return on their investments, allows for the depreciation of the asset and insists on the insurance of the vehicle with its interest noted on the policy to protect its investment. They are satisfied that this provides a decent return for the fund not correlated to the other assets of the funds invested in shares and term deposits. Sole Purpose, S62 and S52 satisfied.
- They amend the SMSF Investment Strategy to include this type of asset with the target allocation to “Other Assets” or specifically have an allocation to “Plant & Equipment”
- They ascertain that the business could be approved to obtain finance for the excavator from a third-party on similar terms. Section 65 met as clear finance available elsewhere and that this is not the reason why the arrangement is being entered into.
- As the value of the excavator ($25k) is less than 5% of the fund ($30K) it does not breach the In house asset rule. This needs to be monitored annually.
- They arrange for a written commercial lease agreement comparable with the standard lease available in the market to be entered into by all parties. S109(1) satisfied
So in summary, yes it can be done but in reality there are so many ways you can trip up that it is really not worth the hassle and raising the eye of the ATO or challenging your Auditor’s patience. Your first step is to engage your Accountant and a SMSF Specialist before considering these types of strategies. I would be interested to receive comments from people who have implemented these strategies.
Why not checkout my article ” What can my SMSF invest in?” as a good place to start.
As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or online via Skype.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Image courtesy of Supertrooper at FreeDigitalPhotos.net
The SMSF Coach 
Darren
/ May 5, 2022Referring to the laptop question above, what if you can actually PROVE it is for the sole use of the SMSF?
All documentation and advice I have seen says you can’t because it is ‘likely’ it will be used for personal use… but I already have a laptop for private use, however it is not powerful enough for what I need for my SMSF (trading/investing).
So if I can actually show that it is used for nothing other than SMSF activities (ie make browser history, drive contents and apps installed available for audit), then surely this can pass the test?
It seems crazy that I am struggling away with a 10yo laptop when I easily have the funds available in my SMSF to purchase something that would pass the test no problem. Is there no scope for this to be allowed?
LikeLike
SMSF Coach - Liam Shorte
/ October 5, 2022Sorry I just saw your message. Yes it is most likely that they will treat this as a depravation of assets and you would most likely be considered a couple already. Reach out to a Centrelink Financial Information Service Officer for guidance.
LikeLike
adam dowden
/ January 23, 2020Hi, I have 250k in my super. I’m looking at ways to invest. I have the opportunity to purchase and excavator in the mining industry, either for myself to work on or have someone operate it for me, with a return of 40k a month. I would have to get finance to buy the excavator costing 400k. Is it possible to use my super to invest in this?
LikeLike
SMSF Coach - Liam Shorte
/ January 23, 2020No you cannot borrow to invest in business equipment through your Superannuation. Sorry but this is just not allowed.
LikeLike
Alexandra
/ May 10, 2019Thank you for a very informative article.
My husband and I own a farm (as a partnership) and presently run commercial Angus cattle.
We would like to purchase stud Angus cattle and lease them (at commercial rates) to our farm.
According to ATO information that we have read, as primary producers, the 5% in-house asset limit does not apply to us.
We would also like to build a small, relocatable building on the farm that we can then lease to the public (like air bnb, stayz, etc). Is this possible, and if so, can the SMSF fund the relocatable building?
Both options above are intended to build wealth within the SMSF for our retirement.
Note – the SMSF will not own the property.
Many thanks in advance.
LikeLike
SMSF Coach - Liam Shorte
/ May 10, 2019Hi Alexandra
I cannot give specific advice on here but an SMSF can own and raise livestock. An SMSF cannot “lease” cattle to a related party as it is not business real property but the SMSF could pay the Farm commercial market rates for agistment, feed and care of the animals
An SMSF will only be able to make this investment if it is permitted by its investment strategy or if you amend your current strategy to allow for this type of investment.
As mentioned above the activities related to the buying, agistment, care, feeding and selling of the livestock should arranged on commercial arm’s length terms with your Partnership (the Farming business)
This would mean that if the SMSF is using your farm/property services for raising the cattle an agreement would need to be drawn up between you and the SMSF with all costs paid by the SMSF to your partnership at market rates.
As always before undertaking any strategy with your SMSF you should discuss it with the fund’s accountant and or auditor and get their input before jumping in.
LikeLike
Heidi Damgaard
/ March 7, 2019Hi there and thank you first of all for a very informative page…😊
My question is specific in relation to buying a storage unit for let’s say $150000
Then rent it back for $600 a month.
To then use it for personal storage or is that braking the rules?
TIA Heidi
LikeLike
SMSF Coach - Liam Shorte
/ March 7, 2019Sorry Heidi but the property must be used wholly and exclusively in a business so I fear you would not meet the rules. Please examples 25 and 26 in the following ruling https://www.ato.gov.au/law/view/document?locid=%27SFR/SMSFR20091/NAT/ATO%27&PiT=99991231235958#P230 even though you charge rent it would not be a premises used for business purposes and imho would fail the test.
LikeLike
John
/ May 22, 2019The Pullet farm we operate is under five acres and our principal place of residence, but no longer profitable due to rising costs and lower prices
It is time to convert the Pullet sheds to a commercial storage business
Can the SMSF purchase the equipment such as modular flat pack units and the shipping containers which will be modified and fixed inside the sheds to form a storage shed.
LikeLike
SMSF Coach - Liam Shorte
/ May 23, 2019Sorry but the SMSF cannot do what you are considering as it would be buying and leasing the equipment back to you or the business who are considered related parities. Equipment is not considered “business real property” so you could not invest more than 5% of your SMSF value in such assets.
Depending on your plans, if the business is big enough to consume most of the property you could consider and seek advice on transferring the whole property into the SMSF and leasing the property back to your business with the home considered as a caretakers/security office. This would then release funds for you/the business to build the modules inside the sheds. This all depends on the the individual situation so I would seek specialist SMSF legal advice in your state. DBA Lawyers in Vic, Townsend Law in NSW or Cooper Grace Ward in QLD. My comments are general advice only and you must seek personal advice rather than relying on my initial thoughts
LikeLike
Michael Chester
/ October 10, 2018Great article
LikeLike
Samuel M
/ July 21, 2017Any possible way to purchase a laptop through my SMSF or lease one without running the risk with the ATO? Strictly for use with the SMSF only.
LikeLike
SMSF Coach - Liam Shorte
/ July 21, 2017Each and every expense of the SMSF must be for the sole purpose of providing retirement benefits for members of the SMSF. As soon as there’s a portion of the expense not for the sole purpose of the SMSF, none of the expense can be claimed in the Self-managed super Fund.
You cannot have your SMSF pay for this expense. Given that the computer is also likely to be used for other private purposes it cannot be paid for by your SMSF given there is an element of private use. Additionally you cannot pro-rata expenses based on SMSF usage, in the same way as you can with your Individual Tax Return. This means that if you use the computer 70% for the SMSF and 30% for personal use, the SMSF still cannot pay for that expense or claim any part of the expense (even the 70%) because there is an element of personal use.
For example and to leave no doubt , if you use it for one personal email, none of the expense can be claimed in the Fund.
On the basis above, its unlikely these type of expenses can be claimed in an SMSF.
I trust this makes sense.
LikeLike
Samuel M
/ July 22, 2017Thanks for the advice.
LikeLike
Vicki C
/ May 30, 2017Is this article still current? I thought a car was a ‘collectible’ and could not be leased to a related party?
LikeLike
SMSF Coach - Liam Shorte
/ May 31, 2017Hi Vicki, this article was meant to address plant and equipment rather than classic cars or personal use cars so I have changed the example to an excavator. Regardless, I have tried to emphasise in the article that while it may be technically possible to own plant and equipment via your SMSF, that the hurdles are large and that the strategy most likely is just not worth the hassle. You have to remember the sole purpose test so anytime someone looks are unusual assets the first question should be “will this assets primary value be to aid the funding of the members retirement income?”
LikeLike