Related party transactions remain one of the most misunderstood areas of SMSF compliance.
Many trustees are aware there are restrictions surrounding transactions involving family members, related entities or businesses connected to the fund. However, there is often confusion around where the line is drawn between what is permitted and what is prohibited.
In reality, the rules are far more nuanced than many trustees expect.
Certain transactions with related parties are specifically allowed under superannuation law, while others can create serious compliance breaches if not managed correctly. Importantly, even where a transaction itself is permitted, trustees must still ensure it occurs on arm’s length terms and is properly documented.
As SMSFs continue to invest in more complex assets and structures, related party compliance has become an increasingly important focus area for auditors and regulators.
Why the Related Party Rules Exist
The related party rules are designed to protect the sole purpose of superannuation.
Broadly speaking, SMSF assets must be maintained for retirement purposes and not used to provide current day benefits to members or their associates. Without restrictions surrounding related party dealings, there would be significant scope for trustees to use SMSF assets inappropriately or structure transactions that provide indirect personal benefits.
For that reason, the SIS Act contains strict provisions regulating:
- acquisitions of assets from related parties
- loans and financial assistance
- use of fund assets
- in-house assets
- non-arm’s length dealings
The challenge for many trustees is that the rules often overlap across multiple sections of superannuation law, making the compliance position less straightforward than it first appears.
Who Is Considered a Related Party?
A related party generally includes fund members and their associates.
Depending on the circumstances, this can extend to relatives, business partners, companies controlled by members or trusts with significant member involvement.
Importantly, trustees should not assume a transaction is acceptable simply because it occurs between “separate entities”. Many compliance breaches arise because trustees fail to recognise that related party definitions under the SIS Act are broader than they expected. This becomes particularly important when dealing with family companies, family trusts or business structures where members maintain influence or control.
Acquiring Assets from Related Parties
One of the most commonly misunderstood areas involves the acquisition of assets from related parties.
Under section 66 of the SIS Act, SMSFs are generally prohibited from intentionally acquiring assets from related parties unless a specific exception applies. This is an area where trustees often incorrectly assume all related party acquisitions are prohibited. In reality, several important exceptions exist.
The most well-known exception relates to business real property.
Commercial property used wholly and exclusively in a business may generally be transferred between a related party and an SMSF, provided the transaction occurs at market value and all other compliance requirements are satisfied. This is one of the most common legitimate related party transactions within the SMSF sector.
The ATO provides further guidance on business real property rules and related party transactions: ATO Business Real Property Rules
Listed securities acquired at market value may also fall within the permitted acquisition exceptions.
Outside these exceptions, however, trustees must approach related party acquisitions very carefully. Residential property transfers between members and their SMSF, for example, are commonly prohibited regardless of whether the transaction occurs at market value.
Arm’s Length Requirements Still Apply
One of the most important points trustees often overlook is that a transaction being “allowed” does not automatically mean it is compliant.
Even where a related party transaction falls within an allowable exception, it must still occur on arm’s length terms. This means the transaction should reflect commercial market conditions as though the parties were unrelated.
Areas trustees should consider include:
- independent market valuations
- commercial lease agreements
- market-based rental terms
- proper documentation
- evidence supporting transaction pricing
This is particularly important where the SMSF leases commercial property to a related business entity.
If arrangements are not maintained on genuine commercial terms, the fund may face compliance issues extending beyond the initial acquisition itself.
Related Party Arrangements and NALI Risks
Trustees should also be mindful of the potential application of the non-arm’s length income (NALI) rules.
Broadly, NALI can arise where an SMSF receives income under arrangements that are not conducted on commercial terms, particularly where a related party provides favourable treatment to the fund.
This may occur where services are provided to the fund at a discounted rate or free of charge, lease arrangements are not maintained on commercial terms, transactions occur below market value or expected expenses are not incurred by the fund.
Where the NALI rules apply, the tax consequences can be significant, with affected income potentially taxed at the highest marginal tax rate rather than the concessional superannuation tax rate. This is the case even if the fund is completely in pension phase and ordinarily receives tax-free treatment on earnings.
The ATO’s page on How SMSFs are Taxed contains further useful information on NALI.
Loans and Financial Assistance
The SIS Act also contains strict rules preventing SMSFs from providing loans or financial assistance to members or their relatives. These rules are broadly interpreted and extend beyond formal loan agreements.
In practice, breaches can arise where trustees:
- allow fund assets to be used personally
- pay member expenses from the SMSF
- provide temporary access to SMSF funds
- allow related parties to benefit from fund assets without proper commercial arrangements
Even relatively small transactions can create compliance problems if they breach the sole purpose test or financial assistance provisions.
This is an area where auditors regularly identify issues during annual reviews.
In-House Asset Considerations
Related party transactions also intersect closely with the in-house asset rules.
Broadly, an in-house asset includes loans to related parties, investments in related entities or assets subject to certain related party arrangements.
SMSFs are generally limited to holding in-house assets totalling no more than 5% of the fund’s total assets.
Importantly, trustees sometimes unintentionally create in-house asset exposures through unit trusts, private companies or informal financial arrangements involving related parties.
This becomes especially relevant where trustees establish investment structures without fully understanding how the in-house asset provisions operate alongside the related party rules.
Documentation and Audit Expectations
Related party transactions typically receive close scrutiny from SMSF auditors.
Where transactions involve property, leases or related entities, auditors will generally expect to see clear supporting documentation demonstrating:
- ownership
- market value evidence
- commercial lease terms
- payment records
- transaction agreements
Poor documentation is one of the most common issues identified during the audit process.
In many cases, trustees believe a transaction itself is compliant but are unable to adequately demonstrate that compliance through supporting evidence.
This is particularly important as the ATO continues to place significant focus on related party dealings across the SMSF sector.
Common Mistakes Trustees Make
Many related party breaches arise from trustees assuming that informal or family-based arrangements are acceptable provided “everyone agrees”.
Unfortunately, superannuation law does not operate on that basis.
Some of the most common issues seen across the sector include:
- residential property being transferred into an SMSF incorrectly
- commercial leases lacking formal documentation
- market valuations not being obtained
- SMSF funds being used for personal expenses
- private company structures unintentionally breaching in-house asset rules
In many situations, trustees are attempting to achieve legitimate outcomes but fail to appreciate how technical the compliance requirements can become.
Final Thoughts
Related party transactions are not automatically prohibited within SMSFs, but they do require careful consideration and proper documentation.
The interaction between section 66 acquisition rules, arm’s length requirements, in-house asset provisions and broader compliance obligations can become highly technical, particularly where property or private structures are involved.
As SMSFs continue to grow in complexity, trustees should ensure related party dealings are approached cautiously and reviewed properly before transactions occur.
What may appear commercially reasonable in a family or business environment does not always align with superannuation law requirements.
Need Assistance Reviewing Related Party Transactions?
Contact our team if you would like assistance reviewing related party transactions, documenting SMSF arrangements or managing ongoing compliance obligations.
GENERAL ADVICE DISCLAIMER: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Before making any investment decision within your SMSF, you should consider whether the information is appropriate to your circumstances and seek professional advice where required.
