Q. Is it possible to own a Racehorse inside a Self-Managed Superannuation fund (SMSF)? With the success of syndicates during the Spring Carnival, my friends and I are considering using our Super funds to acquire an interest in a horse. Thoughts?

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

Superannuation funds must meet the sole purpose test. Broadly, under the sole purpose test, the SIS Act prohibits trustees of a Super fund from maintaining 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 a way of using fund assets to pursue a “hobby or pastime”.

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 additional scrutiny to ensure that the fund initially complies and then continues to comply with this requirement.

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

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?

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

While there is nothing to specifically stop you investing in a racehorse within a SMSF, your fund would, at the very least need to ensure the investment doesn’t cause the fund to breach the sole purpose test or the prudent person test. Your fund would need to ensure the investment is aligned with the investment strategy of the fund, and the ownership of the horse is structured in an appropriate way.

Given all of the above factors and the potentially significant penalties for getting it wrong, is it really worth the punt?