Date Posted: 2 November 2021
Self-Managed Superannuation Funds (SMSF) have long been a favourable investment vehicle for those looking to invest in properties and other investments alike due to the tax concessions and retirement savings growth opportunities the structure provides.
However, if not structured correctly, transactions with related parties can place an SMSF at risk of breaching Superannuation Legislation.
While related party transactions are permitted in the right circumstances under Superannuation Legislation, it is important to note that they do make up over 25% of all breaches reported to the Australian Taxation Office (ATO) by SMSF independent auditors each year. In order for your SMSF to remain compliant with all the relevant rules and regulations, it’s crucial to understand who constitutes a related party and the restrictions around investing and dealing with related parties.
A related party or Part 8 associate of your fund can include:
Some of the commonly related party transactions seen by the ATO include:
SMSFs can purchase listed securities such as shares, debentures, bonds and units from a related party. Importantly, securities must be acquired at market value, and the trustee should retain properly executed off-market share transfer documentation for the fund’s auditor.
Similarly, SMSFs are allowed to purchase business real property from a related party, however it is important sufficient audit evidence is obtained to substantiate the transaction was conducted on an arm’s length basis. Before the acquisition occurs, it is crucial to:
There is no restriction on an SMSF leasing business real property to a related party or Part 8 associate. However, to substantiate that the transaction is on armslength and not in breach of Superannuation Legislation, the Trustee must document all elements of the transaction, including:
Providing loans or financial assistance to a related party are strictly prohibited in the operation of an SMSF. The restriction applies to SMSFs providing cash or assets to a related party and extends to the provision of security over the member’s benefits or fund assets.
The provision of loans to related parties is a very serious breach and is one of the largest compliance issues for the ATO.
Should the provision of loans or financial assistance ever exist, the Fund may breach Superannuation Legislation if the value of the Fund is more than 5% of the Fund’s assets.
Related parties can be a complex area to deal with when operating an SMSF.
As dealings with related parties are under such scrutiny from the ATO, we recommend reaching out to your local BDO adviser before transacting with any related parties or Part 8 Associates.
This article was originally published by BDO. To view the original article, please click here.
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