SMSFs and related party transactions can work well, especially when Business Real Property is involved. It’s an opportunity for your SMSF to invest in property and your business to pay lease income to your SMSF rather than someone else which helps you build up your own retirement savings.
But getting it right is the key!
Here are some simple considerations when looking at Related Party Investments held within a SMSF:
1. Check the SMSF Investment Strategy – all dealings in the Fund should be done in connection with the Investment Strategy. You may need to review and update your strategy.
2. Is the related party transaction allowed under SIS regulations? It is so important as trustee to make sure investments within the SMSF are permitted and transacted in the correct manner.
3. While transferring listed shares is allowed and fairly easy to determine a current market value, other assets such as unlisted shares or units and property are more difficult. These require some proof of how the market value was determined.
Basic conditions when dealing with property and related parties include:
– The SMSF must hold an eligible interest in real property
– The property must meet the business use test and therefore be used wholly and exclusively in one or more businesses carried on by an entity.
– All acquisitions must be made at market value – that may mean you need to pay for an independent valuation, especially where the property forms a significant proportion of the Fund’s assets. Valuations are also required at least every three years for audit purposes.
4. So you are now the trustee, member and the lessee of the SMSF property. It can be a great arrangement where the SMSF owns the property that your business leases. But don’t get it wrong! As soon as the property is leased by a related party you can expect an increase in queries by the auditor.
5. Related party income is looked at in detail, it must be received at arms length ie market value. Either side of market value can cause the entire related party income being taxed at 47% in the Fund. Audit Contraventions may also be reportable which will increase audit fees and put a spotlight over your Fund for the ATO. So get a market rental appraisal and make sure your lease agreement is at commercial rates.
If you are looking at using an SMSF to transact with related parties talk to us first. We will help you get it right the first time. Getting it wrong can cause you an audit nightmare and possibly having to sell the investment.
