SMSF Related Party Transaction Rules Warning
The question often arises whether the SMSF is allowed to enter into a transaction with a member or a related party.
This is a question that is of great concern to the ATO as it is also one of the most commonly breached areas of SMSF operation.
As a compliance focus it relates to whether trustees are meeting their obligations where loans, in-house assets, and non-arms length transactions are concerned.
The first step in ensuring that you don’t fall foul of these rules is to understand what is defined as a related party. The SIS act defines a related party as any of the following:
- A member of the fund
- A relative of a member
- A standard employer-sponsor of the fund (this is an employer that contributes to the fund under arrangement with the trustee. It does not include contributions made under an arrangement with the member). This type of arrangement is relatively rare in modern trust deeds, however you should check your trust deed and associated minutes to ensure employers contributing to the fund are not considered employer sponsors.
- A Part 8 associate of a member (this is a complicated area but will generally catch other members and trustees, people you are in a business relationship with, and people related to those people). A Part 8 associate is not limited to individuals, but
can include other entities where the member (or a group of people or entities related to the member) can significantly influence or hold a majority voting interest in those entities.
If that person or entity that you wish to enter into a transaction with is any of the above, you immediately know that you’re entering into the relatively grey area that is related party transactions.
This is not to say that the transaction automatically cannot occur, bub you should be aware that you will need to be especially careful before you proceed, and there may be limitations on the transaction even if it is able to proceed.
SMSF trustees warned on related party transactions
Self-managed superannuation fund (SMSF) trustees have been advised to finalise any property-related transactions with related parties before new laws come into effect.
The advice has come from specialist financial services legal practice, the Argyle Lawyers, with lawyer Fiona Sonntag pointing out that legislation has been introduced into Parliament to prescribe the requirements for the acquiring or disposing of assets between SMSFs and related parties such as members, associated companies or relatives.
She points out that the new laws are intended to apply from 1 July, this year, and that this will mean that the acquisition and disposal of assets between related parties and SMSF’s should be conducted through an underlying market such as the stock exchange, where one exists.
Sonntag said that where an underlying market does not exist, the transaction had to be supported by a valuation from a suitably qualified independent valuer.
She pointed out that breaches would be subject to civil penalties — and that the breaches did not need to be intentional.
Suggesting a course of action for SMSF trustees, Sonntag said they should finalise any acquisitions of property from related parties before the new law applied; otherwise a valuation from an independent qualified valuer would need to be obtained.