Identifying a related party

Related party is defined broadly. It includes each member of the fund and their relatives, the other trustees, and Business partners and their spouses and children. It also includes entities the members or their associates control, such as certain companies and trusts.

A company owned by a member, a family trust, or a member's spouse are all related parties, so transactions with them attract the restrictions.

The general ban on acquiring assets

An SMSF generally cannot acquire Assets from a related party, even at full market value. This applies to prevent members shifting personal assets into the concessionally taxed super environment.

The rule catches indirect acquisitions too. Buying an asset from a related party through an interposed entity, or entering an arrangement designed to have the same effect, can still fall foul of the restriction.

The narrow exceptions

The main exceptions allow an SMSF to acquire certain assets from a related party at market value. These include listed securities, such as shares in ASX-listed companies, acquired at market price; business real property used wholly and exclusively in a business; and in-house assets that stay within the 5 per cent limit.

Units in some widely held unit trusts can also qualify in defined circumstances. Each exception has conditions: the asset must genuinely fit the category, be transferred at a properly determined market value, and be documented.

The 5 per cent in-house asset limit

An in-house asset is broadly a Loan to, an Investment in, or an asset leased to a related party. The fund's total in-house assets generally cannot exceed 5 per cent of the fund's total assets, measured at market value.

If the in-house assets exceed 5 per cent at the end of a financial year, the trustees must prepare and act on a written plan to reduce them below the threshold. Some arrangements, such as leasing residential property to a relative, are prohibited outright rather than merely limited.

Everything must be at arm's length

Even where a related-party transaction is allowed, it must be conducted on an arm's length basis, meaning on the same terms as would apply between unrelated parties. Buying at a favourable price, charging below-market rent, or lending on soft terms can all breach the rules.

Income from a non-arm's length dealing can be taxed as non-arm's length income at the top marginal rate, rather than the concessional super rate.

A hypothetical example

Consider a hypothetical example. An SMSF buys ASX-listed shares from a member at the day's Market Price and documents the transfer, which is permitted. If the fund instead leased a residential unit from a member's company at a discount, it would breach both the Acquisition and arm's length rules.