Structure of related party ‘crucial’ with related-party loans
With breaches of the in-house asset rules and loans to relatives or members consistently among the top audit contraventions, an SMSF service provider has highlighted some of the common misconceptions with these rules and related-party loans.
In an online article, SMSF services provider Accurium said that breaches of the in-house asset rules and the prohibition on lending to a member or a relative of a member, or providing financial assistance to a member or their relative using the financial resources of the fund, continue to be among the top three audit contraventions.
“An aspect of these two rules, that can be commonly misunderstood, is how they interact with each other,” Accurium said.
“While the in-house asset rules effectively provide a 5 per cent allowance for a loan from an SMSF to a related party, where that related party is an individual — for example, a sole trader or an individual partner in a partnership — section 65 of the SIS Act will also apply.”
“Section 65(1)(a) SIS Act prohibits a fund from providing a loan to a member or relative of a member. Unlike the in-house asset rules, there is no 5 per cent market value ratio calculation allowance for section 65.”
Accurium gave an example of a client with an SMSF planning to lend up to 5 per cent of the value of its assets to their business.
“In this scenario, if the loan from the SMSF to the related party’s business did not result in the market value ratio (MVR) of the fund’s in-house asset exceeding 5 per cent at the time of making the loan, it would not breach the in-house rules. Further, the 30 June market value ratio will also be required to not exceed 5 per cent,” Accurium said.
“However, if the related party’s business was structured as a sole trader, or a partnership where a partner was an individual who was a member of the SMSF or a relative of a member of the SMSF, it would be a breach of section 65(1)(b) SIS Act.”
In this instance, there would be no breach of the in-house asset rules, it said, but there would be a breach of the prohibition on lending to a member or a member’s relative.
“The breach of section 65, as noted above, can still cost the SMSF trustee(s) an administrative penalty of 60 penalty points.”
Accurium also reminded SMSF professionals and trustees to keep the sole purpose test in mind.
“The sole purpose test is to be complied with at all times and needs to be considered with all fund transactions,” it said.
In the scenario where the SMSF lends money to a related party and the related party is structured as an entity — for example, a company — the focus may solely be on ensuring the loan does not exceed 5 per cent both at the time of making the loan and at each 30 June, Accurium stated.
“While the prohibition on lending to a member or relative under section 65 SIS Act may not apply, the SMSF trustee will need to think about how they can evidence that the making of the loan to a related party complies with the sole purpose test under section 62,” it said.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.