Related party transactions are common in self-managed super funds (SMSFs). Whether it’s leasing commercial property to a member’s business, engaging a related party builder or entering into another arrangement with a related entity, these transactions can be entirely legitimate when structured correctly.
However, from an audit perspective, related-party transactions often require closer scrutiny. Not because they are necessarily non-compliant, but because the SIS Act places strict rules around dealings with related parties and auditors need sufficient evidence to demonstrate those rules have been met.
Transactions that commonly result in further enquiries
While every SMSF is different, auditors like Audit your Superfund are more likely to seek additional information where they identify transactions such as:
- Leasing commercial property to a related business
- Construction or renovation work performed by a related-party builder
- Loans involving related parties
- Buying or selling assets to related parties
- Unusual payment arrangements or outstanding balances
- Significant related-party transactions appearing for the first time.
These arrangements are not automatically breaches of the legislation. They simply require appropriate evidence to demonstrate they have been carried out correctly.
What auditors are looking for
When reviewing related party transactions, we typically consider questions such as:
- Is the transaction permitted under the SIS Act?
- Has it been conducted on arm’s length terms?
- Is there evidence to support the market value or market rate?
- Is there a written agreement in place?
- Have the terms of that agreement been followed?
- Is there clear evidence that payments have been made as agreed?
Good documentation reduces audit delays
One of the most effective ways to avoid unnecessary audit queries is to ensure appropriate documentation is prepared and retained throughout the year.
Depending on the transaction, this may include:
- Written agreements
- Independent market valuations or rental appraisals
- Invoices and receipts
- Bank statements showing payments
- Trustee minutes or resolutions
- Supporting correspondence where arrangements have changed.
Some transactions require particular care
Certain types of related party transactions have additional compliance requirements.
For example, construction projects involving related party builders can inadvertently result in a breach of Section 66 if building materials are acquired from the related party rather than directly from an unrelated supplier. You can read more about this in our article, Construction, related-party builders and SMSFs: Avoiding Section 66 breaches.
Similarly, leasing business real property to a related party is permitted in certain circumstances, provided the arrangement is conducted on commercial terms and supported by appropriate documentation. Our article, Issues with SMSFs, related-party agreements and rentals, explains these requirements in more detail.
Early planning makes audits easier
Related party transactions don’t automatically create compliance issues, but they do require careful planning, appropriate documentation and clear evidence that the arrangement has been conducted on commercial terms.
By considering these requirements before entering into a transaction, trustees and their advisers can often avoid unnecessary audit queries and help ensure the audit process runs more smoothly.
If you have any questions about related party transactions or the documentation required to support them, please contact the Audit your Superfund team.