Q: Is it possible to own a Racehorse inside a Self-Managed Superannuation fund (SMSF). I appreciate you can’t use assets of the Super fund for personal use but I don’t want to ride it!

A: This question comes up from time to time, especially around Spring Carnival!  Whilst technically possible, you would need to make sure that you complied with some very specific legal requirements that ultimately may make it all too hard.

Racehorses are typically owned individually, in a partnership or as part of a syndicate.  How the SMSF structured the ownership of a racehorse (for example via a trust or a company), can be an impediment to the asset being owned by the SMSF.

Apart from the ownership structure, there is other criteria that need to be met in order to ensure the investment in a Racehorse is a permitted asset for a SMSF.

Assets of a Superannuation fund must meet the sole purpose test.  Broadly, the SIS Act prohibits trustees of a Super fund from investing assets of the fund for any purpose other than providing members with funding for retirement. The ATO would likely be concerned that the investment in a Racehorse or the management of the Racehorse could be seen as a “hobby or a pastime”.

Investing in a Racehorse would need to be at arms-length.  Standard commercial terms would need to be in place; stabling and management costs such as trainer, strapper and jockey.  Likewise you could not acquire the racehorse directly from a related party.

So yes you riding the horse would likely result in your fund failing the test, you simply owning the horse within the fund may not, by itself, breach this test, but it would be a red flag to the ATO who would most likely put the fund under considerable scrutiny to ensure that the fund initially complies and then continues to comply.

There is another less well known test that applies under the Act which is the “Prudent person test”.  The Prudent person test compels Trustees to act with the same care, skill and diligence for their SMSF as would apply if they were investing on behalf of someone other than themselves. In other words, you can’t be reckless with your assets within the fund if it would be unreasonable for a prudent person to do so.

The investments within a fund must also be aligned with the documented investment strategy of the fund.  At the very least the members of the SMSF would have to agree that investing in a racehorse fits within the investment strategy of the fund.

Is it reasonable to expect that the risk and returns of investing in a racehorse will meet the objectives of providing for retirement savings for the members of the fund?

Provided that ownership of the horse is structured appropriately, the investment in a race horse does not breach the sole purpose test or the prudent person test and is aligned to the investment strategy of the fund, then there is nothing to specifically stop you investing in a racehorse within a SMSF.

However, given all of the above factors and the penalties for getting it wrong, is it really worth the risk?

Follow Andrew on Twitter @AndrewHeavenFP. This article was originally published in The Australian