Related parties and your SMSF
Given the popularity of property investments in SMSFs, whether purchased or transferred, the Australian Taxation Office (ATO) has stepped-up its policing of the rules affecting related parties.
The SMSF trustee, being responsible for administering the fund, is also charged with ensuring that the regulations surrounding related parties are adhered to. Consequently, trustees must be familiar with the law.
A related party can be defined as a member, relative of a member, or a relative of a spouse of any member. Trusts, companies, or other entities controlled by related parties, are also deemed to be related parties.
The following are considered relatives:
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This definition is quite broad, and the Superannuation Industry Supervisor (SIS) legislation generally does not allow SMSFs to purchase an asset from a related party. Similarly, restrictions apply to in-specie transfers, which are direct transfers of assets in place of cash.
There are, however, specific exceptions:
Business real property. Real property is defined by the ATO as land, and interests in land, which includes easements. Generally, these properties are commercial in nature, for example, offices, warehouses and farms.
Real property differs from personal property, which covers all other forms of property with a tangible or intangible value that can be enforced by law. Gold bullion, debts or an interest in a trust fund are examples of personal property.
In-house assets. These assets have been leased, or form part of a lease agreement, between the SMSF trustee and the related party. In-house assets may include an investment in a trust owned by a member of the fund, and loans to, or investment in, a related party of the SMSF.
In-house assets do not include real business properties, and must not exceed 5% of the fund’s total market value.
All real property acquisitions by the SMSF must be at the market value of the asset. When in-specie assets are transferred to the fund, they must be recognised as contributions, and accordingly, are subject to contribution cap regulations.
One final point of importance for SMSF trustees is that all related party acquisitions must adhere to the Sole Purpose Test. For further information on this topic, contact us, or see our article, ‘State your purpose’, in this newsletter edition.
Sources:
www.ato.gov.au Self-Managed Super Funds Ruling 2010/1
www.ato.gov.au New regulations for self-managed super fund investments (last modified 11 July 2011)
www.superguide.com.au Can I invest my super money in my won company? 30 Aug 2010