By Monica Rule

Many people establish a Self Managed Superannuation Fund (SMSF) for its flexibility to invest in anything. As long as the investment is with an unrelated party, it is allowed in the SMSF’s trust deed and investment strategy, and is conducted on commercial terms it is acceptable. But, when it comes to investments involving related parties, there are restrictions.  An SMSF:

• can only purchase a business property from a related party;
• can only invest up to 5% of the total value of its assets in a related entity;
• can only lease an SMSF property (i.e. non business real property) to a related party if the property’s value does not exceed 5% of the value of the SMSF’s asset.
• can only lend money to a related entity of up to 5% of the value of its total assets; and,
• can only invest in a related entity if it is a non-geared entity.

It is important, therefore, to be able to determine who is a related party or a related entity of an SMSF as related party transactions cause the most contraventions by SMSFs and these are of great concern to the Australia Taxation Office (ATO). 

You see, the definition of a related party is not restricted by blood ties or by marriage.  It is much broader than that. 

Under the superannuation law, a related party is:

• A member of the SMSF.  That is, a member making contributions into the SMSF, a member receiving a pension from the SMSF as well as a member who has deferred their entitlements to receive a superannuation benefit from the SMSF.

• A standard employer sponsor of the SMSF.  This is where an employer makes contributions into the SMSF due to an arrangement the employer has with the SMSF trustee. There is a difference between an employer sponsor and a standard employer sponsor.  Most SMSFs have an employer sponsor that makes contributions into their SMSF due to an arrangement with the member of the SMSF (i.e. the member tells to the employer to contribute) and not due to an arrangement the employer has with the SMSF trustee.  Nowadays, the only time that an SMSF has a standard employer sponsor is where the trust deed names one.

• A Part 8 associate of a member or a standard employer sponsor. The reason for the term “Part 8 Associate” is that it is defined under PART 8 - In-House Asset Rules Applying To Regulated Superannuation Funds in the Superannuation Industry (Supervision) Act 1993.

The following people are a Part 8 associate of a member:

• A relative of the member.
• Other members of the SMSF.
• If it is a single member SMSF, then the other trustee, or director of a corporate trustee of the SMSF.
• A business partner of the member as well as any spouse or children of the business partner.
• A trustee of a trust where the member controls the trust.
• A company that is sufficiently influenced by, or in which a majority voting interest is held by, the member or any other Part 8 associate of the member.

Relative:  The superannuation law provides two different definitions of a relative.  One is specific to who can become a member of an SMSF and the other is for related party purposes.  A relative in relation to a related party is a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the individual or of his/her spouse.  It also includes a spouse of the member and any of these individuals.  The most obvious omission from the list is a cousin.

Spouse:  A spouse includes another person (whether of the same sex or a different sex) with whom the person is in a relationship that is registered under a law of a State or Territory.  It also includes a person who, although not legally married to the person, lives with the person on a genuine domestic basis in a relationship as a couple.

Partnership:  When determining whether someone is a business partner of a member of an SMSF, the key consideration is whether a partnership exists.  A partnership is an association of persons carrying on business as partners or in receipt of income or statutory income jointly.  For example, opening a joint bank account which derives interest income; investing in property which derives rent; or creating a partnership to run a business.

The way to work out who is a Part 8 associate of a standard employer is check whether the standard employer sponsor is an individual, a company, or a partnership. 

If the standard employer sponsor is an INDIVIDUAL, then a Part 8 associate is:

• A relative of the individual.
• The spouse of the individual or spouse of any of the relatives.
• A business partner of the individual or a partnership in which the individual is a partner.
• A trustee of a trust (in their capacity as trustee) that is controlled by the individual.
• A company sufficiently influenced by, or in which a majority voting interest is held by the individual, or another Part 8 associate of the individual.

If the standard employer sponsor is a COMPANY, then a Part 8 associate is:

• A partner of the company or a partnership in which the company is a partner.
• A trustee of a trust (in their capacity as trustee of that trust) where the trust is controlled by the company.
• A controlling entity or another entity that is a Part 8 associate of the controlling entity, or a combination of two or more such entities that on its own can sufficiently influence, or holds a majority voting interest in that company.

If the standard employer sponsor is a PARTNERSHIP, then a Part 8 associate is:

• A partner in the partnership.
• If a partner in the partnership is an individual, any Part 8 associates of that individual. 
• If a partner in the partnership is a company, any Part 8 associates of the company.

Control of a Trust:  A member of the SMSF will be considered to control a trust where the member and/or their Part 8 associates are:

• Entitled to a fixed entitlement of more than 50% of the capital of the trust, or
• Able or accustomed to direct the trustee to act in accordance with their directions or
• Able to appoint or remove trustees.

Control of a Company:  A member of the SMSF will be considered to control a company if:

• A company is sufficiently influenced by the member and/or a Part 8 associate of that member.  This is where a majority of its directors, are accustomed, obliged or expected to act in accordance with directions, instructions or wishes of the member and/or Part 8 associates of the member. 
• A member and/or a Part 8 associate of that member have a majority voting interest in a company.  This is where they are in a position to cast, control the casting vote, or have more than 50% of the maximum number of votes at the annual general meeting of that company.

Once you have identified whether a person or an entity is a related party, then you are in a position to consider the compliance of the investment transactions between the SMSF and the related party.

Gold and Platinum Members please read on for examples of related parties.

Monica Rule is an SMSF Specialist and author – www.monicarule.com.au

Related documents:

• Self Managed Superannuation Fund Deed
• Pension Pack for Self Managed Super
• SMSF - Deed Update
• Build a Company (ELodgement)
• Investment Strategy for Self Managed Super 15/16

“Disclaimer: The content of this Bulletin is general information only. It is not legal advice. The statements and opinions are the expression of the author, not Law Central, and have not been checked for their accuracy, completeness or changes in the law. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin. ”