Revisiting the definition of related party
29 March 2024
In the last few years we have seen property markets across the country significantly increase in sales and prices, along with an increase in the number of Self-Managed Superannuation Funds, which continues to grow.
With SMSFs now allowing to have a maximum of six members, it’s important to understand the ‘related party’ definition, which not only gives the opportunity to bring in extended family members who previously were unable join existing funds, but also presents new investment opportunities for those who are looking to maximise their superannuation and member benefits by pooling resources together in an SMSF with friends and associates.
The potential risk
New and existing Trustees and Directors of Corporate Trustees may not be aware that the definition of ‘related party’ in the SIS Act encompasses more than only direct family members. When entering into agreements, arrangements, or transactions, there are very strict rules that must be complied with when related parties are involved.
If a fund has members that are unbeknownst dealing with related parties and not complying with these rules, the penalties can be quite significant as in the In-House Asset provisions.
What is a related party in SMSF?
The SIS Act (s10) defines "related party" of a superannuation fund as
a) a member of the fund;
b) a standard employer-sponsor of the fund;
c) Part 8 associate of an entity referred to in points (a) or (b).
Standard employer–sponsors are employers who contribute to your super fund for the benefit of a member, under an arrangement between the employer and a trustee of your fund.
Associates of standard employer–sponsors include:
business partners and companies or trusts the employer controls (either alone or with their other associates)
companies and trusts that control the employer
The Part 8 Associate definitions can be found in s70A, s70B, and s70c of the SIS Act, or you can review the more succinct definitions on the ATO website.
“Associates of fund members” can include:
relatives of each member
business partners of each member
any spouse or child of those business partners
any company the member or their associates control or influence
any trust the member or their associates control
A relative of a member means any of the following:
a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the member or their spouse
a spouse of any individual specified above
For example, if a family of four with an existing SMSF invites two friends to join their fund, pool their resources, and purchase a residential property, and that property is then leased to the son of one of the new members business partners, as residential property leased to a related party is not exempt under the IHA provisions, and the tenant falls under the Part 8 associate arm of the definition, this lease would be deemed an in-house asset (IHA).
An in-house asset is any of the following:
a loan to, or an investment in, a related party of your fund
an investment in a related trust of your fund
an asset of your fund that is leased to a related party.
There are some exceptions, including:
business real property that is leased between your fund and a related party of your fund; and
some investments in related non-geared trusts or companies.
In-house assets can't be more than 5% of your fund’s total assets.
Or if that same SMSF with six members wants to invest in an unrelated unit trust (non-s.13.22C), and the SMSF holds 35% of the units to ensure there is no control or significant influence, but one of the other unitholders with a 20% holding is a company that is controlled by one of the new member’s relatives, then their holding is captured and pushes the SMSF’s related party ownership percentage over 50%, resulting in the fund unknowingly having a controlling interest, resulting in an investment deemed an IHA.
Key takeaways
With a closer look at the definition, those considered a related party to a member of an SMSF is quite broad.
The following areas within an SMSF that may present risk of non compliance include:
Lease Agreements (tenant/s)
Sale/Purchase of Real Property (Buyer/Seller)
Collectables/Personal Use Assets (including leasing of items and storage concerns)
Unlisted Companies/Unit Trust (Unit/Share Registry – Control?)
Holiday/Airbnb Homes (usage of premises and hiring of staff)
Loans/Borrowings (Related LRBA’s)
The team at Unison SMSF recommend becoming familiar with the Part 8 Associate arm of the definition and reassessing the parties involved in your current super fund arrangements. If the fund introduces new members or enters new agreements, arrangements, or transactions in the future, ensure to obtain the necessary information from all members to meet the super fund’s compliance requirements regarding related party transactions.
Our team of experts at Unison SMSF can help clarify any further queries. Get in touch with a member of our team today.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the thought or position of Unison SMSF.
This document contains general information and is not intended to constitute legal or taxation advice. If you need legal or taxation advice, we recommend you speak to a qualified adviser.
By Brenton Percy
Unison ABN 31 315 285 606 © Findex 2024
Some of the Unison SMSF Audit personnel involved in providing services may be members of a professional scheme approved under Professional Standards Legislation such that their occupational liability is limited under that Legislation. To the extent that applies, the following disclaimer applies to them. If you have any questions about the applicability of Professional Standards Legislation to Unison SMSF Audit’s personnel involved in providing services please speak to your Unison SMSF Audit adviser.
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