Rules for interacting with “relatives" in superannuation

29 Nov 2019

Lyn Formica

Head of SMSF Technical & Education Services

The superannuation law includes various rules SMSFs must follow when interacting with “relatives”. Who is included as a “relative” for this purpose?

As with many questions superannuation related, the answer to this question is “it depends”. This is because there are several different definitions of “relative” in the superannuation law.

For example, to satisfy the SMSF definition, no member must be an employee of another member unless they are relatives. For this purpose, a “relative” means:

  • a parent, child, grandparent, grandchild, sibling, aunt, uncle, great-aunt, great-uncle, niece, nephew, first or second cousin of the individual or his or her spouse or former spouse, and
  • a spouse or former spouse of the individual or any individual listed above.

However, the same term is defined differently in other areas of superannuation law. 

For example, superannuation funds are prohibited from lending money or providing financial assistance to members or relatives. A “relative” for this purpose is similar but has some important differences including:

  • it does not include former spouses, cousins, great aunts and uncles; but
  • it does include all lineal descendants of the individual rather than just children and grandchildren.

The superannuation law also places restrictions on SMSFs transacting with “related parties” including requiring that:

  • funds not intentional acquire assets from “related parties” (unless an exception applies),
  • funds not invest more than 5% of their assets in in-house assets. An “in-house asset” includes a loan to a related party, an investment in a related party (including a related trust), or an asset leased to a related party, and
  • where a fund owns assets classified as “collectables” they cannot be stored in the private residence of a related party or leased to a related party.

The definition of a “related party” includes relatives but is much wider. It specifically captures:

  • the members of the fund,
  • a standard employer sponsor of the fund (relatively rare in SMSFs), and
  • a Part 8 Associate of a member or standard employer sponsor.

The Part 8 Associates of a fund’s members include:

  • the relatives of each member (the relative definition here is the same as that used for the rules prohibiting loans to members or relatives),
  • if the fund is an SMSF: the other members of the fund,
  • if the fund is a single member SMSF: all directors of the corporate trustee or all the trustees if the fund has individual trustees,
  • if the member is a partner in a partnership: the other partners in the partnership, the spouse and children of those other partners and the partnership,
  • any company which is controlled by the member and/or their Part 8 Associates, and
  • the trustee of any trust which is controlled by the member and/or their Part 8 Associates.

Given the various rules that apply to interactions between superannuation funds and the relatives and related parties of the fund, it is critical to understand the nuances in each definition.