Investments, SMSF

Dig deep into related-party concerns

related party investments SMSF

Consistently reviewing the relationships between parties to an investment is the most prudent way to ensure clients do not fall foul of the related-party rules.

SMSF practitioners must conduct a comprehensive analysis to ascertain whether clients are involved with a related party when providing guidance on potential investments.

“It’s really important that you do delve deep into what the relationships are between all the different people. I just say straight away: ‘Are you related in any way? Even if you’re married to that person’s sibling or the like?’” Cooper Partners Financial Services director Jemma Sanderson said during the latest ASF Audits podcast in conversation with ASF Audits head of education Shelley Banton.

“[They might say] ‘we’re just mates’. [They] might have been mates since forever and bought a house together when [they were] at university.

“Well at the moment, if you still own that house as tenants in common, [they’re] related parties because they’re considered to be in a partnership under the tax provisions.

“So you really need to not just look at the particular transaction and [ask your client to] put everything on the table and then we can dismiss the things that we need to and go on from there.”

Sanderson added fund members may accidently enter into a related-party relationship simply through a change of circumstances rather than a deliberate action, using as an example the impact the death or incapacitation of a member in a multi-party investment could have on the relationship between the associated parties.

To that end, she encouraged trustees in an investment to constantly review their relationships with other parties to ensure they do not fall foul of the related-party rules.

“So it’s just being aware of all of [those circumstances]. It’s not just that you set up [the fund and investment] and it’s fine. It’s an ongoing consideration from that perspective,” she stated.

“But once you’re aware of who a related party is and you go down the path of looking and making sure that the investment or the transaction you’re looking at is maybe not with a related party, then there is a lot more that [the client] can do.”

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