Transactions with related-parties can be tricky for Trustees. Trustees should be cautious when purchasing certain assets from related-parties or entities controlled by a related party. However, there are exceptions such as listed shares or business real properties. Alternatively, there is an exception for in-house assets as long as the value of the assets are kept within the allowed range of less than 5% of the Fund. In some scenarios, related-party transactions can happen without even being noticed by Trustees. In our recent audit case, Trustees used their personal bank account to purchase collection shoes from a third-party and treated it as a non-concessional contribution in the Fund. There are strict ATO rules regarding the contributions, that is, only cash contributions and in-specie contributions of listed shares and business real properties, as well as widely held unit trust (Managed Investments) can be accepted. Generally, Trustees must not intentionally acquire assets (including in specie contributions) from related parties of the Fund. In this case, the ‘contributions’ would be treated as a transaction with a related party. Furthermore, unless the value of the collection shoes are under the limit of in-house assets in the Fund, Trustees has breached the rule of not trading with a related-party. A recent post by Darin Tyson Chan discusses some issues regarding the related-party purchases:
SMSF – Related Party Transactions
For further guidance on related party transactions, please see the video from the ATO below:
Source: Australian Taxation Office
Frequently Asked Questions (Q&A):
Q: What is the difference between a widely held unit trust and a privately held unit trust?
A widely held unit trust has many unrelated investors, so an SMSF is allowed to buy units. A privately held unit trust is controlled by related parties, so an SMSF’s investment is either prohibited or treated as an in-house asset unless the trust meets the section 13.22C rules.