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Fundamentals key to related-party investments

SMSF advisers must follow and understand 11 fundamental rules when dealing with related-party-type investments in order to efficiently assess and rectify transactions, an SMSF technical expert has said.

“Ensure it complies with the sole purpose test, keep fund assets separate, no loans or financial assistance to members or relatives, follow limited borrowing rules, make sure there is never a charge over fund assets, and act on arm’s-length terms,” Heffron Consulting SMSF technical and education services director Lyn Formica told the SMSF Association National Conference 2018 in Sydney last week.

“SMSFs are restricted from acquiring assets from related parties unless particular provisions are met, no more than 5 per cent of the fund’s assets can be invested in in-house assets, and make sure you actually have an investment strategy for the fund and you regularly review it.

“Finally, comply with the fund’s trust deed and ensure income is not non-arm’s-length income.”

Formica said advisers who worked through these rules on investment restrictions were better able to identify where a transaction was likely to overstep the mark, as well as rein in any issues to achieve compliance.

“If you’ve got those fundamental rules down pat, it’s going to make it easier for you to assess a transaction or [situations] that your client is coming to you with,” she said.

She also reminded advisers to ensure they remained alert to ATO target areas.

“Have a look at the case studies when they put them out, which also gives you a good idea of the areas that the ATO is watching,” she said.

“Also make sure you watch for progress on any proposed changes in relation to non-arm’s-length income changes.”

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