A popular question around Melbourne Cup time, can your SMSF invest in a racehorse?
Unfortunately, the answer isn’t a simple yes or no.
Whilst there is no direct restriction on investing in a race horse, the biggest issue is whether investing in a racehorse satisfies the specific legal requirements of superannuation law. Ultimately, more often than not, investing in a racehorse rationally is too complex to be a genuine retirement investment option. This is especially true when SMSF trustees must exercise, in relation to all matters affecting the fund, the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide.
One of the main legal requirements to satisfy is the Sole Purpose Test.
The ‘Sole Purpose Test’ requires your fund to be used exclusively to provide;
- retirement benefits,
- benefits for each fund member on reaching age 65, and
- for member’s dependants or the member’s legal personal representative in the event of the member’s death.
Your SMSF must meet the Sole Purpose Test at all times, being particularly careful to ensure your fund is investing in an asset to save for retirement – not for your own personal benefit (i.e. a VIP ticket to a marquee at Flemington!)
What happens if you fail to comply with the Sole Purpose Test?
Failure to comply with the Sole Purpose Test may expose members of your SMSF to penalties from the ATO. Contravention, or involvement in a contravention, may result in your disqualification from the fund, attract a civil or criminal penalty and may place the fund’s status as a complying superannuation fund under the SIS Act at risk.
Seek guidance from an SMSF Specialist to get it right
With so many stringent conditions to be adhered to and the high likelihood of ongoing scrutiny from the ATO we would highly recommend gaining the advice of an appropriately qualified SMSF Specialist regarding investments within your fund.
Disclaimer: The information contained in this document is provided for educational purposes only, is general in nature and is prepared without taking into account particular objective, financial circumstances, legal and tax issues and needs. The information provided in this article is not a substitute for legal, tax and financial product advice. Before making any decision based on this information, you should assess its relevance to your individual circumstances. While SMSF Association believes that the information provided in this article is accurate, no warranty is given as to its accuracy and persons who rely on this information do so at their own risk. The information provided in this bulletin is not considered financial product advice for the purposes of the Corporations Act 2001.