The term related party of a super fund is relevant to two significant investment standards in the SIS Act which apply to all super funds. These are:

*     the prohibition of acquisition of assets from a related party (section 66), and
*     the 5% market value limit of a loan to, an investment in, a lease arrangement with a related party of the fund, or an investment in a related trust (section 71).

These standards are subject to some important exceptions, which are discussed a little later. In addition, all investments made between a super fund trustee and a related party must be made and maintained on a strict commercial, arm’s length basis.

Particularly with SMSFs, using an independent, suitably qualified valuer to establish the market value for these types of transactions is strongly recommended. There is a penalty regime* in place for trustees who contravene these rules.
* Section 166 of SIS Act 1993.

Who is a related party?

Section 10(1) of the SIS act defines a related party as:
*     a member of the fund or a Part 8 associate of a member, or
*     a standard employer–sponsor of the fund or a Part 8 associate of a standard employer-sponsor of the fund.

For SMSFs, it is the first part of this definition which is most relevant, as few SMSFs have a standard employer sponsor (ie an employer who has a formal arrangement with the trustees of the fund to contribute to the fund on behalf of their employees who are members of that fund).

Defining a Part 8 Associate

A Part 8 Associate includes:

1.   for an individual who is a member of an SMSF:
a. each other member of the fund
b. if the fund is a single member SMSF whose trustee is a company – each director of that company
c. if the fund is a single member SMSF whose trustees are individuals – those individuals
2.   a relative of any of the members of the SMSF, including spouses of the member or the member’s relatives
3.   a partner of an individual member or a partnership in which the individual member is a partner
4.   if a partner of the individual member is an individual – the spouse or a child of that individual
5.   a trustee of a trust (in the capacity of trustee of that trust) where the individual member controls the trust
6.   a company that is sufficiently controlled by:
a. the individual member
b. a Part 8 associate or associates of the individual member (as described above), or
c. an individual member and one or more of their Part 8 associates combined.

What is control?

There are two tests that may be used to determine whether an individual SMSF member has control of an entity (ie company or trust).

Actual control

An individual member has control (via a majority voting interest) of a company if the individual member is in a position to cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of the company.

This majority voting interest may be held either in their own right or in conjunction with one or more of their Part 8 associates, or where one or more Part 8 associates are in such a position.

An individual member controls a trust where they have a fixed entitlement to more than 50% of the capital or income of the trust in their own right, or in conjunction with their Part 8 associates, or their Part 8 associates have that fixed entitlement in their own right.

Effective control

It is possible for a company to be a related party where an individual member has effective control of a company (but where actual control is less than or equal to 50% voting rights).

This occurs where the individual member in their own right or in conjunction with their Part 8 associates, or where one or more of their Part 8 associates in their own right, exercises sufficient influence over the company or a majority of the directors of the company.

The influence needs to be such that the company or its directors are accustomed or would be expected to act in accordance with the directions of the above individuals or Part 8 associates. The arrangement can be direct or indirect through interposed entities, or as part of an obligation which is either formal or informal.

A fixed or discretionary trust can similarly be sufficiently influenced so as to be treated as a related party. In addition, a trust is a related party where any of the individual members and/or entities discussed above are able to remove or appoint trustees or a majority of the trustees of the trust.

Other related parties

A company is a related party to its holding company where the holding company has a majority interest in it or exercises sufficient control over the company or its directors.

Equally, a company which is a partner in a partnership is a related party to the other partners, their spouses and children (where the partners are individuals) and with the partnership itself.


Acquiring assets

As a general rule, a trustee cannot acquire assets from a related party subject to a few exceptions. The main exceptions are:

*     listed securities and business real property (BRP)** acquired at market value
*     widely held trusts including managed funds
*     life insurance policies (other than policies owned by members and/or relatives)
*     assets acquired from another fund as a result of marital breakdown, and
*     certain in-house assets***.

** Ruling SMSFR 2009/1 explains the definition of business real property for the purpose of the SIS Act.
*** Ruling SMSFR 2009/4 clarifies what constitutes an ‘in-house asset’

An in-house asset is any of the following:

*     a loan to, or an investment in, a related party of the fund, for example, private company shares in a company controlled by a member or their Part 8 associates
*     an investment in a related trust, for example, a private trust controlled by a member or their Part 8 associates.

Assets must be acquired at market value and not exceed the 5% in-house asset limit.

Note:  An asset that is leased to a related party either before or after the acquisition by an SMSF is not eligible to be acquired under this exemption (see SMSFD 2010/1).

In-house assets

Exceptions to the in-house asset requirement that no more than 5% of a fund’s assets in aggregate be invested in in-house assets are listed and include:

*     deposits with an Authorised Deposit-taking Institution
*     life policies
*     investments in a pooled superannuation trust
*     for SMSFs, business real property leased back to a related party
*     investment in a widely held trust, for example, a managed fund
*     property owned as tenants in common by the SMSF and related parties provided it is not subject to a lease arrangement with a related party, and
*     trusts or companies which would otherwise be related trusts or companies but satisfy the requirements of SIS Regulations 13.22C and 13.22D.

Loans to or investments in related parties, the lease of SMSF assets to related parties or investments in related trusts are otherwise to be treated as in-house assets subject to the 5% market value limitation in aggregate.

Concepts such as who is a related party or what would qualify as business real property apply equally to these provisions as they do to the section 66 requirements around the prohibition of acquisition of assets from related parties discussed above.

SMSF can seem complex.  We have a special offer for general advice for $225.00.
Please click here for more information.
For more information on this subject feel free to get in touch with us click here
To receive free updates on relevant information click here
To read more about our specialised service offers for SMSF please click here 

Disclaimer and Warning
The information above is of a general nature only.  It should not be used as a source to make financial decisions.  It’s also important to note that the legislation and figures related to this topic tend to change regularly and therefore the information above may not reflect the current status.  We recommend that if you are looking for advice on this matter, you should contact us .