Self-managed super funds (SMSFs) have a number of investment restrictions that apply to transactions conducted within the fund.

One such restriction applies to transactions involving ‘related parties’ of the fund and ‘relatives of members.’ No one associated with the SMSF should obtain a present-day benefit from the fund’s investments.

The ATO considers a ‘related party’ as:

• All members of the fund.
• Associates of fund members, including;
  • Relatives of each member.
  • The business partners of each member.
  • Any spouse or child of those business partners.
  • Any company the member or their associates’ control or influence.
  • Any trust the member or their associate’s control.
• Standard employer sponsors, who are employers who contribute to your super fund for the benefit of a member under an arrangement between the employer and a trustee of the fund.
• Associates of standard employer-sponsors, which include business partners and companies or trusts the employer controls (either alone or with their other associates) and companies and trusts that control the employer.

The fund must meet the ‘sole purpose test’ of providing death or retirement benefits to the SMSF members or their dependents (that is, that they are making decisions in the best interests of the members for retirement reasons, not their current interests).

Failing the sole purpose test can lead to:

• An SMSF losing its concessional tax treatment (meaning the fund may need to pay additional tax on its superannuation contributions and investment earnings)
• The trustees being disqualified from their roles (meaning they can no longer be members of the SMSF, nor can they start a new fund)
• Fines or imprisonment of the fund trustees, depending on the seriousness of the legislative breach.

A breach of the investment restrictions may result in significant penalties, such as disqualification of a trustee and even prosecution. This can result in significant penalties.

Ask yourself this question before making a decision on an investment: what is the purpose of it? Is it to provide a retirement benefit for the members of the SMSF? If the answer is no, avoid potential breaches by not investing.

If you are ever concerned about your SMSF’s compliance with the laws, particularly when dealing with ‘related’ parties, please contact a professional, licensed adviser for further information.