Here are five of the traps or misconceptions we see – the kind of issues that don’t always show up on checklists but can derail a strategy fast.
“A related party tenant is using the property to carry on their business. There is residential use as well, but that is by an unrelated tenant – so we’re fine.”
You’d think this one would be straightforward. The residential tenant isn’t a related party – tick. But the property itself includes residential use. This scenario will likely cause the property to cease to qualify as business real property and be regarded as an in-house asset of the fund. It usually causes the fund to breach its in-house asset levels. Will disposal of the property be required? It depends.
“We’ll just treat the shortfall between market value and cash as a contribution.”
It’s common: the SMSF acquires business real property from a related party but doesn’t pay full market value in cash; rather, the difference is labelled a contribution.
Which might work – but only if you’ve covered all the angles. Does the paperwork support the intent? Have you thought about NALI? And if the contribution is to count towards the non-concessional cap, is it coming from the right place?
NALE: It’s not just about what you don’t pay
This one flies under the radar. It’s not always about paying too little – sometimes, it’s about who’s doing the work. Think tradies, real estate agents, or lawyers who want to “help” their SMSF by doing work themselves.
But is it a trustee duty or something more than that? And who is providing the service – the trustee or their business? The answers matter – because the wrong call could taint all the income from the property with NALI.
“We refinanced from a third-party lender to a related-party loan – easy.”
It sounds straightforward. Refinance a limited recourse borrowing arrangement (LRBA) from a third-party lender to a related-party loan, follow the safe harbour rules, job done. Except: has the outstanding balance been correctly calculated? What about the impact on the member’s total super balance and contribution eligibility? And if the original loan was, say, already eight years old, how long can the new one run? Are repayments being reset every July? If you aren’t getting the safe harbour rules right and you can’t evidence the terms of the loan are commercial, then there is a good chance you might have a NALI problem.
Investing via a partnership – the structure no one’s talking about
Somewhere between related trusts and SMSFs going solo sits a structure that used to get more attention: the partnership.
It’s quiet, often misunderstood, and rarely the first idea that comes up in strategy meetings. But it’s still out there – and depending on the set-up, it can raise fewer flags than the more obvious structures. That said, “fewer flags” doesn’t mean none. Partnerships with related parties bring their own set of risks – especially around who’s doing what, who’s paying for what, and how the benefits are shared.
If you’ve been in this space for a while, none of this is new. But what is new is how often these scenarios are getting noticed – unfortunately, there is little room for error when it comes to documentation and demonstrating commerciality.
