SMSF investing in related trusts and companies: Key rules to know

The main compliance issues relevant for SMSFs when entering a related party investment are the in-house asset rules.

An in-house asset includes:

• Investments that an SMSF has in a related party (including related trusts and companies)
• Loans made by an SMSF to a related party
• An SMSF asset that is leased to a related party (but does not include business real property leased on arm’s-length terms).

There is a 5% limit imposed on the total value of all in-house assets held. That is, an SMSF can hold no more than 5% of its assets as in-house assets. Breaching this limit will result in compliance issues and often results in penalties being applied.

However, there is an exception to the in-house asset rules for certain SMSF investments in related trusts and related companies, where those trusts and companies adhere to specific requirements.

This exception is often referred to as the related ungeared trust exception and it requires all of the following to be met at all times:

• There can be no borrowings taken out by the related trust or company. The related entity must be ‘ungeared’.
• The related trust or company cannot lend any money to anyone.
• The assets of the related trust or company cannot be used as security; no charges over these assets are allowed.
• The trust or company cannot lease any of its assets to related parties (with the exception of business real property).
• The trust or company must not carry on a business.
• The trust or company cannot invest in any other entity (not even listed shares).

Who and what are related parties?

To understand when a company or trust is deemed a related entity requires an understanding of who the related parties of an SMSF actually are.

This is important as an entity will be deemed to be a related party and hence trigger the in-house asset rules where it is controlled by a related party.

For a company, it is where the SMSF alone or together with any related party controls the company. Essentially where:

• A majority of the directors are “accustomed or under an obligation” to do what other people direct them to do. So where they are making decisions regarding the company based on other people’s wishes; or
• The SMSF alone or together with related parties can cast more than 50% of the votes at a general meeting of the company.

For a trust, it is where the SMSF alone or together with any related party controls the trust, where:

• The SMSF alone or together with related parties has a fixed entitlement to more than 50% of the capital or income of the trust; or
• The trustees are “accustomed or under an obligation” to do what other people direct them to do. So where they are making decisions regarding the company based on other people’s wishes; or
• Where the SMSF and/or related parties can appoint or remove the trustee of that trust

The term ‘related party’ has a very specific definition under the superannuation law and includes:

• A member of the fund: So all of the individual SMSF members.
• A standard employer-sponsor: This includes any employer who contributes to a super fund under an agreement between the fund trustee and the employer. This is rarely, as contributions to an SMSF are in almost all cases made under an agreement between the employer and the fund member, not in the member’s capacity as a trustee.
• A Part 8 associate of a member of the fund or a standard employer sponsor. Part 8 associates include:
  • Fund members and their relatives, directors of the corporate trustee or all individual trustees, partnerships in which the member is a partner (including the individual partners, their spouse or child and the partnership itself), a trust where the member and their Part 8 associates control the trust and a company if a member and their Part 8 associates control the company.

Other regulations and guidelines

If you are considering using your SMSF to invest in a related unit trust or company, there are other regulations and guidelines you need to consider, including the following:

Your SMSF investment strategy

All SMSF investments need to be acquired and maintained in accordance with the funds overall investment strategy.

2026 SMSF calendar

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You need to consider the need for diversification within the fund’s investment portfolio in order to manage risk effectively.

Make sure your SMSF investment strategy covers any related party investment and, where appropriate, detail how any associated risk will be managed.

Your SMSF trust deed and its wording

Refer to your SMSF trust deed for any fund specific rule or restriction relevant to related party investments.

There may be specific processes or restrictions imposed by your trust deed. Having a clear understanding of these is important.

Where required, update or amend your trust deed prior to any investment taking place.

Related party transactions

There are strict rules regarding transactions between SMSFs and related parties, which would include investments held in related trusts or companies.

These rules require all transactions to be entered into and then maintained on an arm’s-length basis. This essentially requires the terms of the investment and all dealings between parties to be carried out as if the parties were not related.

Sole purpose test

The sole purpose of a super fund is to provide retirement benefits to the members of the fund or to their dependents on the member’s death. The sole purpose test is used as the basis for determining whether the fund is being maintained appropriately.

All transactions entered into by the SMSF and all investment decisions made by the fund trustees must be made with the sole purpose of the members retirement in mind.

The SMSF regulator makes the following comment regarding the sole purpose test:

“It’s likely your fund will not meet the sole purpose test if you or anyone else, directly or indirectly, obtains a financial benefit when making investment decisions and arrangements (other than increasing the return to your fund).”

Therefore, if your SMSF makes an investment into a related entity, that investment must be made with the intention of providing retirement benefits and not for the direct or indirect financial benefit of the members or related parties.

The bottom line

As you can see, it is possible for your SMSF to invest in related companies and trusts, but you will need to have a good understanding of the relevant compliance requirements relating to the initial investment and those relevant on an ongoing basis.

If this is an area that you want to explore further, it may be a good idea to seek professional advice.

The information contained in this article is general in nature. Your personal position has not been taken into consideration. You should seek personal advice before taking any action.