In order for a SMSF to enter into an investment with any parties without contravening the Superannuation Law, it is imperative that the SMSF trustee determines whether the investment transaction is entered into with a related party of the SMSF. This is because the law imposes certain limitations on an SMSF’s activities with its related parties.
The term “related party” is defined in the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’) under section 10 and includes members of the SMSF and Part 8 associates of members. The term “Part 8 associates” include relatives of members of the SMSF.
Complications and misunderstandings sometimes occur when a SMSF enters into an investment transaction with a relative of a member of the SMSF. This is because which individuals are defined as a “relative” of a member appears in two separate areas of the SISA and are for different purposes.
The term “relative” under section 10 of the SISA is for investment transaction purposes. On the other hand, the term “relative” under section 17A of the SISA determines which individuals can be in an SMSF together. As listed below, the definition of a relative under section 10 does not include a cousin or a former spouse of the member, unlike the definition of a relative under section 17A.
| Section 10 of the SISA | Section 17A of the SISA | |
|---|---|---|
| Definition of 'related party' | Related party of a superannuation fund means any of the following: - a member of the fund - a standard employer-sponsor of the fund; - a Part 8 associate of a member or a standard employer-sponsor. Under subsection 70B(a) of the SISA, a Part 8 associate of an individual includes a relative of the individual. | |
| Definition of 'relative' | The term relative of an individual means the following: - a parent - grandparent - brother - sister - uncle - aunt - nephew - niece - lineal descendant - adopted child of the individual or of his or her spouse - a spouse of the individual or of any other individual referred to above. | The term relative, in relation to an individual, means: - a parent - child - grandparent - grandchild - sibling - aunt - uncle - great aun - great uncle - niece - nephew - first cousin or second cousin of the individual or of his or her spouse or former spouse; or - a spouse or former spouse of the individual, or of an individual referred to above. |
| Circumstances where the definition is relevant | - Section 65 of the SISA: lending money of the fund or giving any other financial assistance using the resources of the fund to members of the fund or to a relative of a member of the fund. - Section 66 of the SISA: intentionally acquiring an asset from a related party of the fund. - Section 71 of the SISA: entering into an in-house asset transaction with a related party of the fund. | Definition of an SMSF: - For funds with more than one member, no member of the fund can be an employee of another member of the fund, unless the members concerned are relatives. - For single member funds with a body corporate, the member can be one of only two directors of the body corporate, and the member and the other director are relatives. If the two directors are not related, then the member must not be an employee of the other director. - For single member funds with individual trustees, the member is one of only two trustees, of whom one is the member and the other is a relative of the member. If the two trustees are not related, then the member must not be an employee of the other trustee. |
| Example of some individuals not captured under relative definition | - Former spouse - Cousin |
The definition of a “related party” and a “relative” are crucial and relatively complicated under the Superannuation Law.
As summarised above, a member’s cousin and their former spouse are not captured by section 10 of SISA. Therefore, as long as they are also not members of a SMSF, the SMSF can lend money to these people without contravening the Superannuation Law. This is provided the investment transaction is entered into and conducted at arm’s length and is in accordance with their SMSF’s investment strategy.