Self-Managed Superannuation Funds (SMSF) have long been a favourable investment vehicle for those looking to invest in properties and other investments alike due to the tax concessions and retirement savings growth opportunities the structure provides.
However, if not structured correctly, transactions with related parties can place an SMSF at risk of breaching Superannuation Legislation.
While related party transactions are permitted in the right circumstances under Superannuation Legislation, it is important to note that they do make up over 25% of all breaches reported to the Australian Taxation Office (ATO) by SMSF independent auditors each year. In order for your SMSF to remain compliant with all the relevant rules and regulations, it’s crucial to understand who constitutes a related party and the restrictions around investing and dealing with related parties.
Who is a related party?
A related party or Part 8 associate of your fund can include:
- All members of the fund
- Associates of fund members, such as:
- Relatives (parents, grandparents, brothers, sisters, uncles, aunts, nephews, nieces, lineal descendant or adopted child of the member, or a spouse of any of the aforementioned)
- A business partner and their spouse or children
- Companies the member or their associates control or influence
- Trusts the member or their associates control.
- Standard employer-sponsors
- Associates of standard employer-sponsors.
Related party transactions
Some of the commonly related party transactions seen by the ATO include:
- Acquiring listed security from a related party
- Acquiring business real property from a related party
- Leasing fund assets to a related party
- Providing loans to a related party.
Acquiring listed securities from a related party
SMSFs can purchase listed securities such as shares, debentures, bonds and units from a related party. Importantly, securities must be acquired at market value, and the trustee should retain properly executed off-market share transfer documentation for the fund’s auditor.
Acquiring business real property from a related party
Similarly, SMSFs are allowed to purchase business real property from a related party, however it is important sufficient audit evidence is obtained to substantiate the transaction was conducted on an arm’s length basis.
Before the acquisition occurs, it is crucial to:
- Obtain an independent property valuation or market appraisal from a qualified third party and ensure the purchase price is in line with the appraisal
- Formally document the acquisition and pay particular attention to the drafting of the contract to ensure that the property is correctly being purchased in the name of the trustee (s) as Trustee for the Fund.
Leasing business real property to a related party
There is no restriction on an SMSF leasing business real property to a related party or Part 8 associate. However, to substantiate that the transaction is on armslength and not in breach of Superannuation Legislation, the Trustee must document all elements of the transaction, including:
- Obtain a rental appraisal from a qualified party and ensure rental amounts being received are in line with the appraisal obtained
- Document the lease via a formal lease agreement, setting out the terms and conditions of the lease
- Review the rental appraisal & lease agreement periodically to ensure that any uplifts in market rent are reflected in the rental amounts received.
Providing loans or financial assistance to a related party
Providing loans or financial assistance to a related party are strictly prohibited in the operation of an SMSF. The restriction applies to SMSFs providing cash or assets to a related party and extends to the provision of security over the member’s benefits or fund assets.
The provision of loans to related parties is a very serious breach and is one of the largest compliance issues for the ATO.
Should the provision of loans or financial assistance ever exist, the Fund may breach Superannuation Legislation if the value of the Fund is more than 5% of the Fund’s assets.
How we can help
Related parties can be a complex area to deal with when operating an SMSF.
As dealings with related parties are under such scrutiny from the ATO, we recommend reaching out to your local BDO adviser before transacting with any related parties or Part 8 Associates.
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