Who isn’t a Related Party of My SMSF?
When examining the related parties of an SMSF it is important to remember that trustees, or directors of a corporate trustee, and members are generally the same people so we can examine them all using the term members. The key issue is that the ATO gets concerned about members getting access to their member benefits before they are entitled to do so known as early access. Other concerns include using a SMSF to shelter an investment in a concessionally taxed environment for the benefit of a related entity, member or relative instead of an investment being made for the sole purpose of providing retirement benefits for its members or member’s beneficiary if the member dies beforehand.
We do need to understand what a related party investment looks like. There are a lot of articles and blogs discussing what a related party of a SMSF is. However, there are often situations where people can have close business relationships which look suspiciously like they are connected and possibly related but when taking a deeper dive, the parties are in fact not related.
Let’s look at an example.
Tony and Michael are cousins. They are both in business together, operating a local supermarket through a company called, Supermart Pty Ltd (Supermart). They both are directors and own 50% each of the shares and neither individual has a chairman’s vote in the case of a tie in relation to decisions being made or has sufficient influence to control the company.
Tony is the sole member of “Tony’s Family SFD” (TFS) and the sole director of the corporate trustee, T & L Pty Ltd (T L). Michael is a sole member of “Michael’s SFD” (MS) and a sole director of the corporate trustee, M & K Pty Ltd (MK).
TFS and MS want to pool cash and purchase units in a private unit trust which will be called, Tony & Michael Unit Trust (TMUT). Tony and Michael will be the directors of T & M Pty Ltd (T &M) which is to be the corporate trustee and both super funds will be issued with equal number of units. TFS and MS will own equal shares in T & M (trustee of TMUT) and neither Tony or Michael will have a chairman’s vote in the case of a tie in relation to decisions being made or have sufficient influence to control the company. TMUT is considering purchasing a residential property, at market value, from Tony’s grandson, Paul. TMUT will borrow $20,000 to pay for stamp duty on the property. The property is currently leased to an unrelated third party and will continue to be leased to the same tenant.
Are Tony and Michael related parties of TFS and MS?
They are not in partnership with each other and Supermart is their only shared investment. Whilst neither of them controls Supermart Tony and Michael are relatives and intuitively you would automatically think the investment in Supermart would make them related parties of both super funds.
Section10 of the Superannuation Industry (Supervision) Act 1993 (SISA) define what a relative is in relation to related parties when dealing with in-house assets and acquisition of assets from related parties. A SMSF member and their relatives are related parties of the SMSF. Interestingly, the definition of relative does not include a former spouse, cousins, second cousins, great-grandparents, great-aunts, great-uncles, nephew’s children or niece’s children.
TFS and MS can purchase units in TMUT as Tony and Michael are cousins and not related parties of either SMSF. TMUT will not be a related unit trust of TFS or MS.
Can TMUT purchase a residential property from Paul?
A SMSF, generally, cannot purchase a residential property from a related party. Anti-avoidance rules prevent a SMSF trustee from entering into a scheme to acquire assets from a related party if the SMSF could not purchase it directly. It is likely the ATO would see the investment into TMUT as a scheme to circumvent the prohibition of acquiring assets from a related party.
Given the circumstances we need to examine each SMSF.
Paul is Tony’s grandson and therefore is defined as a relative under SISA. Tony’s relatives include his lineal descendants which capture his grandchildren and great grandchildren. Paul is a related party of TFS.
Paul is the second cousin of Michael. A cousin or second cousin is not defined as a relative under SISA. Paul is not a related party of MS.
TFS can acquire units in TMUT as it is an unrelated unit trust. However, If TMUT acquires the residential property from Paul TFS is likely to be caught under the anti-avoidance rules and will contravene S66 -prohibition on acquiring a property (not business real property) from a related party of a SMSF.
On the other hand, MS will not contravene S66 as Paul is not a related party of MS.
Another option available to Tony and Michael wishing to use their SMSFs to purchase a residential property is to select a property from an unrelated third party. Furthermore, they can possibly avoid establishing a separate unit trust by contributing the stamp duty money to their SMSFs subject to contribution caps so the two SMSFs can jointly purchase the property.