With the demise of an SMSF’s ability to acquire residential property using limited recourse borrowing there has been an understandable focus on the availability of alternative avenues. One suggestion has been to purchase a property via a unit trust or company where the property is geared under ordinary commercial rules.
A prime consideration of any such strategy is the application of the in-house asset test – both at inception and ongoing. If the fund holds equity in such a geared structure, it will be an in-house asset if the entity is related. Essentially, if the SMSF, and its related parties and Part 8 associates, hold no more than 50% of the interest in the entity and wield no more than 50% of the control over the entity, it won’t be related and the SMSF can hold the investment without it becoming an in-house asset.
A related party includes any member of the fund, any trustee of the fund, and any spouse of a member or trustee. The definition also extends to any relatives of members and trustees, including children (both biological and adopted), parents, grandparents and other lineal ancestors, siblings, aunts, uncles, nieces and nephews, lineal descendants (grandchildren and beyond), and the spouses of any of those relatives. It does not include cousins.
Beyond immediate family members, the related party definition encompasses any entity that a member or trustee controls. This includes companies, partnerships, and trusts where a fund member or trustee has decision-making power or owns a controlling interest. Additionally, “Part 8 associates” under superannuation law are treated as related parties. These associates include business partners of members or trustees and the spouses of business partners.
So, what does this mean in simple terms. The other 50% owners of the entity must be unrelated and at arm’s length to the SMSF and its broad list of related parties and part 8 associates. Family friends or neighbours might be fine, just not someone who subsequently becomes part of the family tree or who goes into partnership with any fund member or trustee. These considerations can get quite complex so any proposed activity involving any party who might possibly crash the idea should be referred to an expert.
On related note, if you are interested in transferring your SMSF administration to ourselves we have a transferring fee arrangement you might find of interest. I’m always happy to have a chat about what we can do for you. Feel free to call David Busoli on 0499 778 584.
