The superannuation law places restrictions on SMSFs transacting with ‘related parties’, namely that:
- Funds do not intentionally acquire assets from “related parties” (unless an exception applies).
- Funds do not invest more than 5 per cent of their assets in in-house assets. An ‘in-house asset’ includes a loan to a related party, an investment in a related party (including a related trust), or an asset leased to a related party.
- Where a fund owns assets classified as ‘collectables’ they cannot be stored in the private residence of a related party or leased to a related party.
David Busoli, principal of SMSF Alliance, said the SIS Act pays special attention to the inherent conflict of interest that exists in all SMSFs due to the trustees being members, and vice versa.
“This limits the financial dealings that the fund can have with related parties so identifying who these are is vital,” he said.
It’s important to understand who these ‘related parties’ are for two reasons – to ensure compliance with the acquisition from related party rules and to determine the in-house assets.
Mr Busoli said SIS sec 10(1) defines ‘related parties’ as a member, standard employer/sponsor of the fund or a part 8 associate, but identifying these is not always clear.
“Fund members are obvious. Less obvious is a standard employer/sponsor of the fund,” he said.
A standard employer/sponsor is an employer who contributes to the fund due to an agreement between the employer and the trustee of the fund. These, according to Mr Busoli, were common in the early days of SMSFs but largely non-existent now.
Where an employer only contributes to a fund due to an agreement between the member and the employer, such as under a salary sacrifice arrangement, they will not be considered a standard employer sponsor.
If an SMSF has a standard employer sponsor, which would be uncommon, the relationship will be noted either in the trust deed or in an attached schedule to the deed.
“It would be highly unlikely for them to exist now, but it is best to check,” Mr Busoli said.
“Less obvious still are the part 8 associates of a member.”
Part 8 associations can come under a number of categories. They could be a relative of the member such as a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the member or their spouse, or a spouse of the aforementioned. Ironically, it does not include cousins.
They could also be other members of the SMSF and other trustees/directors of a corporate trustee of the fund or partners of the member and their spouses and children, not necessarily co-directors/shareholders in a private company.
Finally, a Part 8 associate may be the trustee of a trust the member controls and a company sufficiently influenced by, or in which majority voting interest is held by the member and their Part 8 associates either individually or together.
Mr Busoli said a member of the fund will be deemed to control a trust where:
- The member and/or their part 8 associates are either entitled to a fixed entitlement of over 50 per cent of the trust’s capital or entitled to a fixed entitlement of over 50 per cent of the trust’s income.
- The member is able or accustomed (formally or informally) to direct the trustees to act in accordance with their directions.
- The member is able to appoint or remove trustees.
“A company will be deemed to be controlled by a member where the directors are accustomed or under an obligation to act under the instructions of the member and/ or their Part 8 associates or the member and/ or their part 8 associates have more than 50 per cent of the voting rights,” he said.
