Making sure there’s no conflict of interest
Transactions between parties related to the SMSF trustees or members can be allowed, but there are very strict rules about when and how they can be carried out. The ATO keeps a sharp eye on transactions between related parties. Transactions must be at fair market value and show that the SMSF was not unfairly advantaged or disadvantaged by the transaction.
Here’s a refresher on the arm’s length rules with regard to SMSFs and property. The definition of related parties is quite broad; if this article brings up concerns about one of your clients’ transactions or proposed transactions, give us a call.
Purchase and sale of fund assets
The performance and income of the fund must not be disadvantaged by offering a sale of property to a related party at less than market rate. This rule is in place to protect the income and future value of the SMSF in preparing for members’ retirement.
In the same way, the purchase of a business property from a related party should also be conducted on market value terms.
Let’s say your client wants to buy or sell a property through their SMSF. This is usually acceptable if:
- the party they buy from or sell to is unrelated to the members or trustees
- they sell to a related party on market value terms based on an independent valuation.
- they buy from a related party only if it is business property AND all purchase transactions are made at market value AND there was a proper independent valuation prior to the purchase.
All three of these transactions should be considered to be at arm’s length.
Income from fund assets
The performance and income of the fund must not be disadvantaged by offering a lease of a business property to related parties at less than market rate.
In addition adverse income tax consequences may arise if the property is leased at terms greater than a market value rate.
Let’s say your client wants to buy a business property through their SMSF and lease it to their business. Business real property is exempt from the in-house asset 5% rule, but arm’s length transaction rules still apply. Leasing a business property to a related party is usually acceptable if:
- the related party leases the property from the fund at true market value
- an official commercial lease is in place and it is conducted on market value terms.
In this case the transaction should be considered to be at arm’s length.
If a fund is found to be in breach, income on offending assets could be taxed at the highest rate. Worse penalties can also apply. Mistakes or deliberate contraventions can cost your clients thousands in fines, or their fund could be found non-complying.
Not sure if your clients have done the right thing?
If there’s anything in this article that makes you wonder if a client has done the wrong thing, give us a call. We’re here to help clarify the rules and try to correct any issues before the ATO whacks them with the long arm of the law.
Contact TriSuper Auditors on 1300 TRISUP or visit our website for further info.
Joel Curry of TriSuper Auditors is one of the country’s leading SMSF auditors, having personally conducted in excess of 9,000 audits and is rated in the top 5% by the ATO. He is also a highly sought-after commentator on all matters SMSF and has been published in a number of publications including SMSF Adviser, Canstar and Money.