Your SMSF will need investments, and it may need to borrow in order to make those investments. One of the crucial things to understand in your SMSF investment strategy is that you cannot invest or loan to any related parties.
In fact, in the last 12 months the ATO has put a lot of focus on transactions involving related parties within SMSF on some of the rulings around related party loans and related borrowing. Read on to find out how this affects you and why.
What does the ATO’s ruling on related parties mean?
Basically, it comes downs to understanding the fundamental purpose of your fund – and that is to provide death or retirement benefits to your members and dependants. This means it should not be used as a tool to benefit you or your dependants or any related party in the present-day.
What is a related party?
There are many ways a person or persons could be considered a ‘related party’ with regard your SMSF. The ATO have laid out a list that shows what is usually considered to be a related party – ATO Related Parties
Basically, a related party is a close associate, such as
Members of your fund
Associates of your fund members (including relatives, companies controlled or influenced by members and business partners)
Standard employer-sponsors – these are employers who contribute to the fund for the benefit of a member.
Associates of standard employer-sponsors
In simple terms, you cannot use your SMSF to benefit those you associate with – your related parties. By doing so, you could be damaging your fund but most importantly, you would be removing its purpose is to flourish over time and be beneficial in the event of retirement or death. Any benefit taken prior to that destroys its intent.
What would a related party transaction look like?
Some examples of a related party transaction might be a related party loan or a related party acquisition, or it could be related party assets. The property, for example, can only be purchased from a related party on a commercial basis – meaning it must be commercial property and under commercial terms.
A key thing to remember when considering related party transactions is that arm’s length basis applies to transactions for your SMSF. Arm’s length means that any investment made by your SMSF must be made on a commercial basis – at market value and the income from such assets should have a true market rate of return.
So, if your SMSF purchases a residential property, it cannot be rented to related party even on commercial terms. However, commercial property can be rented to related party provided the lease terms are on arm’s length basis.
How does third-party affect your investment strategy for your SMSF?
With that in mind, you need to plan your investment strategy so that your SMSF does not use third party transactions to help it grow.
The ATO and ASIC’s Money Smart websites can give you some more information about what you can and cannot do to help your fund grow.
Disclaimer: This information should not be considered personal financial advice as it is intended to provide general advice only. This factsheet has been prepared by Superhelp Australia Pty Ltd without taking into account your personal objectives, financial situations or needs.
The information contained in the fact sheet may not be appropriate to your individual needs, therefore, you should seek personal financial advice before making any financial or investment decisions.
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