As a small business owner facing financial distress, the idea of tapping into your self-managed superannuation fund (SMSF) may seem like a viable solution. After all, superannuation is your money saved over the years, and accessing it during times of crisis feels reasonable. However, Australia’s superannuation laws are very strict, and using your super to prop up your business can result in serious legal consequences. Here’s an in-depth look at what the law allows, and what risks you may face.
Can You Access Super to Save a Business?
Unfortunately, accessing your super to save a business is not permitted under Australian law. According to the Australian Taxation Office (ATO), early access to super is generally only allowed under specific circumstances, none of which include business rescue. Common grounds for early access are:
- Severe financial hardship: You may be eligible if you’ve been receiving government income support for a continuous period of at least 26 weeks and cannot meet your immediate living expenses.
- Compassionate grounds: In limited situations, super can be accessed early for purposes such as paying for medical treatment, funeral costs, or to prevent the foreclosure of your home. However, saving a business is not classified as a compassionate ground for early release.
Using your super early outside of these defined conditions could result in significant penalties and legal consequences.
SMSF Laws: What Are the Rules?
For those with an SMSF, the rules are even stricter. As a member and trustee of an SMSF, you are responsible for ensuring the fund’s assets are used only for retirement purposes.
Under Section 65 of the Superannuation Industry Supervision Act, an SMSF trustee is prohibited from lending money or providing financial assistance to any member or their relative. Accessing super to help a struggling business falls directly under this restriction, making it illegal.
In 2023-24 alone, the ATO disqualified 666 SMSF trustees for violating these superannuation laws, with early illegal access being one of the primary reasons for disqualification.
Can You Sell Your Business Property to Your SMSF?
If you own the premises where your business operates, there is one potential strategy that could free up some funds legally: selling the property to your SMSF. This is allowed under Section 66 of the Superannuation Industry Supervision Act, which prohibits an SMSF from acquiring assets from related parties, with an exception for commercial real estate used exclusively by the business.
However, several conditions must be met for this strategy to be compliant:
- Sole-purpose test: The transaction must serve the sole purpose of providing retirement benefits to the SMSF members.
- Arm’s length transaction: The sale must be conducted at market value, and any leaseback arrangement must reflect market rental rates. The SMSF must not pay more than the property is worth, or the fund could face taxation issues. If your business fails to meet its rental obligations, the arrangement could be viewed as financial assistance, violating Section 65.
While this strategy can be a legal way to inject some liquidity into your business, it requires careful planning, adherence to strict regulations, and should align with the SMSF’s investment strategy.
What Are the Consequences of Breaking Super Laws?
Penalties for illegal early access to super or violating related-party transaction rules are severe:
- Tax penalties: Any illegally accessed super will be fully taxed.
- Disqualification: SMSF trustees can be disqualified by the ATO, and their names are published on the disqualified trustees’ register.
- Fines and imprisonment: More severe violations can lead to fines of up to $750,000, and in the most serious cases, up to five years of imprisonment.
Given the high stakes, it’s crucial to avoid contravening super laws. If your business is struggling, other solutions should be considered first, such as restructuring debt, seeking government assistance, or professional insolvency advice.
Final Thoughts
While it may be tempting to turn to your superannuation for immediate financial relief during tough times, doing so outside the strict legal conditions can lead to severe penalties. If you’re considering selling a business property to your SMSF or exploring other strategies, seek professional advice from a financial planner or SMSF specialist to ensure compliance with the law.
When it comes to superannuation, the rules are designed to protect your retirement savings. It’s important to tread carefully and ensure that any decisions you make align with both your long-term financial security and legal obligations.
