SMSFs must benefit from related-party transactions
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Darin Tyson-Chan is a journalist with InvestorDaily, a Morningstar publication.
Self-managed superannuation fund (SMSF) trustees entering into related-party transactions need to make satisfying the sole purpose test the primary objective of the arrangement, according to an industry expert.
"We need to draw the line or identify if the investment in a related party is for the benefit of my retirement or is it for the benefit of the related party," Cavendish Superannuation head of technical services Tim Miller said.
"From an SMSF point of view, unfortunately we still see a lot of these transactions not being for the benefit of retirement but more so for the benefit of the related party at the time of the transaction."
Miller warned if a related party transaction was categorised as an in-house asset, it might not be such a wise investment in any case as it would be restricted.
"We're getting ourselves into a tight situation with these related-party transactions, especially in the case of in-house assets, because we're restricted as to what we can invest in," he said.
"The 5 per cent restriction makes the whole concept of related-party transactions, an investment in a related company, questionable. Is it really that attractive if we're limited to 5 per cent of the value of the fund?
"I'd suggest that in many instances it's not because you actually want that investment to perform well. If you're restricted in the level you can invest in through the superannuation fund, then you're not really able to provide the entire benefit from that investment."
He pointed out satisfying the sole purpose test was not as difficult as it sounded due to tax ruling SMSFR 2008/2.
"The Australian Taxation Office made it a little bit more flexible when it released this ruling because it said if there is a benefit associated to you as a member and if it is incidental or remote, it won't necessarily cause you to fail the sole purpose test," he explained.