Related Party Transactions: What SMSF Auditors Look For

Related party transactions are an area of particular focus for SMSF auditors. While transactions with related parties are not automatically prohibited, they must comply with the Superannuation Industry (Supervision) Act 1993 (SIS Act), the fund’s investment strategy and the arm’s-length requirements.

Two areas that commonly require careful attention are leases and loans.

Leases with related parties

SMSFs can lease certain assets to related parties, but strict rules apply. One of the key considerations is whether the arrangement is on commercial, arm’s-length terms.

For example, where an SMSF owns commercial property that is leased to a business operated by a related party, an auditor will generally look at whether:

• A formal lease agreement is in place.

• The rent reflects market value and is being paid as agreed.

• The terms of the lease are commercially reasonable.

• The arrangement complies with the in-house asset rules.

• The property is permitted to be leased to the related party under the relevant SMSF rules.

Business real property can generally receive different treatment under the in-house asset rules, but the requirements need to be carefully considered. Auditors may also review evidence supporting the property's market value and the rental amount, particularly where the arrangement has been established or changed during the financial year.

Loans and financial transactions

Loans involving related parties are another significant area of risk. SMSFs are generally prohibited from lending money or providing financial assistance to members or their relatives, subject to limited exceptions.

Where a SMSF has a loan or other financial arrangement involving a related party, an auditor will look closely at the nature of the transaction, the parties involved, the terms and whether the arrangement complies with the SIS Act.

The auditor may also need to consider whether a transaction creates an in-house asset, whether it was entered into on commercial terms and whether appropriate documentation and evidence support the arrangement.

What should trustees keep?

Good documentation is one of the best ways trustees can demonstrate that a related party transaction is legitimate and compliant. Depending on the transaction, this may include lease agreements, market valuations, market rental evidence, loan documentation, repayment records, bank statements and trustee minutes.

Related party transactions can be perfectly legitimate within an SMSF, but they require careful planning and ongoing compliance. If you are considering entering into a transaction with a related party, it is important to understand the rules before the transaction takes place—not simply when the fund's annual audit begins.

For any questions or more information on how our experienced team can assist, reach out via our website contact page.