When related parties can spoil the fun(d)

“Understanding who's a related party, who's a part eight associate and what are the rules surrounding those investments in related parties and partnerships can be the difference between being compliant and having a conversation with the ATO,” she said.

The rules and regulations around related parties and part eight associates are contained in section 10 of the SIS Act.

“It's important to be aware of the differences because if you are interacting with a related party, there are certain exemptions to some of those restrictions,” Ms Sanderson said.

She said who is a related party is easier to understand as it includes all relatives of a member or trustee, but it also has to be broken down further to consider what other entities may be captured under the regulations.

“That’s where part eight comes in as it dovetails into in-house assets,” Ms Sanderson said.

“In-house assets are probably one of the areas where it’s important to look at how different rules interact because of restrictions on the level of in-house assets that a superfund can have.”

Sections 70B, C, D, and E of the SIS Act deal with the related party of individuals, companies, and trusts, and delve further into the terms of what is considered to be in control and have sufficient influence.

Ms Sanderson said it’s important for advisers to delve deep into the relationships between all people involved in an SMSF because they can become crucial to compliance issues.

“Most people understand the concept of control in relation to related parties through owning more than 50 per cent of the units or shares in an entity, but you also have to understand how the concept of control extends to sufficiently influencing the decisions of an entity,” she said.

However, situations can arise that can tip the balance which is explained in section 70E of the SIS Act.

“It not only comes down to ensuring that not only is the ownership of any asset in the fund 50/50, or not more than 50 but also the directorships for trustee company is not more than 50 per cent,” she said.

“I would also avoid situations where you might have an individual who is one of the directors and then another director is a colleague or an employee of the other person.”

Auditors should ask each year for evidence that investments are still held by unrelated parties.

“You can get a situation where you've got two people in an entity that aren't related, but then the kids will get on as friends and end up getting married, in which case you've got an unrelated entity that goes automatically to a related entity,” she said.

“The whole thing can potentially become an in-house asset.”

An in-house asset is a fund investing in a related party such as taking up equity or lending money to a related party.

“That related party could be a business that the person is involved in or owns that the fund has invested in, but it also can be an asset of the fund that is leased to a related party,” Ms Sanderson said.

“From an in-house asset perspective, we're talking about investments by the fund in private companies, closely held unit trusts, or they might be loans to entities that are running businesses, not to the individuals themselves because that in itself is a different section of the legislation of which we have we have to be mindful.”

It can also include property investments the fund might be leasing to a related party.

However, if the fund owns a business property and it's leased to a related party, that can be exempt from the in-house assets test provided all the requirements are satisfied from that perspective.

“Additionally, if the person already owned that property, or they had an entity that was related that owns that property, that's also exempt from the section 66 provisions,” she said. “So a superfund can acquire a business property from a related party and you don't fall foul of section 66 as long as you satisfy all the requirements.”