“Critical” related party structure with related party loans
With breaches of house rules on assets and loans to relatives or members consistently among the top audit violations, an SMSF service provider highlighted some of the common misconceptions about these rules and loans to parties linked.
In an online article, SMSF service provider Accurium said violations of internal asset rules and the prohibition on loaning to a member or relative of a member, or providing financial assistance to a member or to a loved one using the fund’s financial resources, continue to be among the top three audit violations.
“One aspect of these two rules that can be often misunderstood is the way they interact with each other,” Accurium said.
“While internal asset rules do provide for a 5% provision for a loan from an SMSF to a related party, when that related party is an individual – for example, an individual entrepreneur or an individual partner in a partnership – Article 65 of the SIS law will also apply.
“Section 65 (1) (a) of the SIS Act prohibits a fund from granting a loan to a member or a relative of a member. Contrary to internal asset rules, there is no allowance for calculating the 5 percent market value ratio for section 65. ”
Accurium gave the example of a client with an SMSF planning to lend up to 5% of the value of its assets to its business.
“In this scenario, if the SMSF loan to the related party’s business did not result in a market value ratio (MVR) of the internal assets of the fund greater than 5% at the time of granting the loan , it would not violate internal rules. In addition, the market value ratio as of June 30 should also not exceed 5%, ”said Accurium.
“However, if the business of the related party was structured as a sole proprietorship or as a partnership in which a partner was a natural person member of the SMSF or a relative of a member of the SMSF, this would constitute a violation of Article 65 (1) (b) SIS Act. “
In this case, there would be no violation of internal rules on assets, he said, but there would be a violation of the ban on loaning to a member or a relative of a member.
“Violation of Section 65, as noted above, can still cost the SMSF trustee (s) an administrative penalty of 60 penalty points. “
Accurium also reminded SMSF professionals and administrators to keep single-purpose testing in mind.
“The sole objective of the test is to be met at all times and must be considered for all fund transactions,” he said.
In the event that the SMSF lends money to a related party and the related party is structured as an entity – for example, a corporation – the focus may be only on ensuring that the loan does not exceed 5 for one hundred both when making the loan and every June 30, Accurium said.
“Although the prohibition on loaning to a member or relative under section 65 of the SIS Act may not apply, the SMSF trustee will need to consider how he can prove that the granting the loan to a related party complies with the sole purpose criterion provided for in Article 62, ”he said.
Miranda Brownlee is the Associate Editor-in-Chief of SMSF Adviser, which is the premier source of information, strategy and educational content for professionals working in the SMSF industry.
Since joining the team in 2014, Miranda has been responsible for publishing some of Australia’s biggest pensions stories and has published extensively on technical strategy and legislative updates. Miranda also ran the print publication of SMSF Adviser for several years.
Miranda also has extensive experience in business reporting and financial services, having written for titles such as Investor Daily, ifa and Accountants Daily.