SMSF Related Party Asset Acquisition Paradox

5 Sep 2023

Written by

David Busoli, Principal

Generally, an SMSF can only acquire unlisted shares in a company from a member or associate if the company is related. This is because the shares would constitute in-house assets so the SMSF is able to acquire them provided this would not cause the total level of in-house assets in the fund to breach 5%.

An SMSF can invest more than 5% of its assets in a company that is unrelated. Typically, this occurs when the SMSF, along with its members, collectively owns no more than 50% of a company that they do not otherwise control. There is no limit to the % of SMSF assets the SMSF can invest because the investment in the unlisted company is not an in-house asset.

A paradox arises if the SMSF wishes to acquire such company shares from a member as, because the shares do not constitute an in-house asset, the SMSF cannot acquire them. The SMSF could acquire the shares of the other, unrelated, shareholders but care is required as, if this results in the SMSF and its members collectively breaching the 50% limit, then the company would become “controlled” so the whole of the SMSF’s investment in the company will become an in-house asset and be limited to 5% of the SMSF’s assets. Units in a unit trust are treated similarly.

There are always exceptions of course. An entity that satisfies Sec 13.22C is treated quite differently and will be considered next week.

As usual, the devil is in the detail.

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