Who is your relative for SMSF purposes and why is this relevant?

Daniel Butler, Director, DBA Lawyers

It is important to understand who is an individual’s relative for superannuation law purposes as the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’) imposes certain boundaries on an SMSF’s activities in relation to an individual’s relative or related party. There are two definitions of the term relative in the SISA. Oddly, in some circumstances, an individual’s relative may not be their relative under the SISA! This article considers the two definitions of relative in the SISA and the main circumstances where these definitions are relevant.

Definition under s 10 of the SISA

Broadly, s 10(1) of the SISA states that the term relative of an individual means:

• a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the individual or of his or her spouse;
• a spouse of the individual or of any other individual referred to above.

Main circumstances where the definition in s 10 of the SISA is relevant

We consider three main circumstances where the definition under s 10 of the SISA is relevant. These are:

1.  Section 65(1) of the SISA contains a general prohibition on the trustee of an SMSF lending money of the SMSF or giving any other financial assistance using the resources of the SMSF to a member of the SMSF or a relative of the member of the SMSF.
2. Section 66(1) of the SISA contains a general prohibition on the trustee of an SMSF acquiring an asset from a related party of the SMSF.
3. The in-house asset rules in pt 8 of the SISA broadly defines an in-house asset to be an asset of the fund that is a loan to, or an investment in, a related party of the fund, an investment in a related trust of the fund, or an asset of the fund subject to a lease or lease arrangement between a trustee of the fund and a related party of the fund.

We illustrate the first circumstance below.

EXAMPLE

As can be seen from the first circumstance, s 65(1) (the no financial assistance rule) makes a direct reference to the term relative. For the second and third circumstance (prohibition on acquiring assets from related parties and in-house asset rules), there is no direct reference to the term relative. However, the term relative is connected because of the definition of related party.

Section 10(1) of the SISA states that related party, of a superannuation fund, means any of the following:

(a)  a member of the fund;

(b)  a standard employer‑sponsor of the fund;

(c)  a Part 8 associate of an entity referred to in paragraph (a) or (b).

Section 70B of the SISA contains the definition of a pt 8 associate of individuals. It states:

For the purposes of this Part, each of the following is a Part 8 associate of an individual (the primary entity), whether or not the primary entity is in the capacity of trustee:

(a)  a relative of the primary entity;
…

Tracing through these extracted provisions, a relative (as defined in s 10 of the SISA) of an individual is also a related party of an individual.

The following example illustrates the relevance of the term relative in the context of working out whether an individual is a related party.

EXAMPLE

This example shows that in certain circumstances someone who is an individual’s relative in the usual sense of the word may not be their relative for superannuation law purposes.

It is interesting to note that the definition in s 10(1) is not exhaustive. Broadly, the definition does not include, in relation to an individual:

• their great-grandparents, great-aunts, great-uncles or any earlier generation
• their cousins (such as first cousins and second cousins) and lineal descendants of cousins;
• the lineal descendants of their nephews;
• the lineal descendants of their nieces; and
• former spouses.

Definition under s 17A of the SISA

The meaning of the term SMSF is defined in s 17A of the SISA. Broadly, s 17A(1) of the SISA states that the term relative, in relation to an individual means:

• a parent, child, grandparent, grandchild, sibling, aunt, uncle, great‑aunt, great‑uncle, niece, nephew, first cousin or second cousin of the individual or of his or her spouse or former spouse; or
• a spouse or former spouse of the individual, or of an individual referred to above.

Unlike the other definition of ‘relative’, this definition of relative casts a wider net and includes cousins.

Main circumstances where the definition in s 17A of the SISA is relevant

Broadly, the relevance of the term relative is as follows:

• For funds with more than one member, no member of the fund can be an employee of another member of the fund, unless the members concerned are relatives. This would include cousins
• Similarly, for single member funds with more than one trustee/director, the member must not be an employee of the non-member trustee/director, unless the member and the non-member trustee/director are relatives.

The definition in s 17A is different to the definition in s 10. Some key differences include:

• The definition in s 10 refers to ‘lineal descendant’. However, the definition in s 17A refers to ‘child’ and ‘grandchild’. This suggests that the definition in s 17A does not extend to great-grandchildren or subsequent generations. For example, an SMSF trustee may be prohibited from lending to the SMSF member’s great-grandchild. On a separate analysis, if the individual employed their great-grandchild they could not both be members of the same SMSF.
• The definition in s 17A includes ‘great-aunt’ and ‘great-uncle’. Accordingly, if a ‘great-aunt’ or ‘great-uncle’ employed the individual, they could both still be members of the same SMSF.
• Both definitions refer to ‘spouse’. However, the definition in s 17A also includes ‘former spouse’, meaning the former spouses can share an SMSF even if one employs the other.

Conclusion

While there is some overlap, the definitions of relative in ss 10 and 17A of the SISA do not totally match. It is important to consider whether there are any relatives involved in certain courses of action such as acquiring an asset or establishing an SMSF. This is a complex area of law and where in doubt, expert advice should be obtained.

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Note: DBA Lawyers hold SMSF CPD training at venues all around. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.

16 November 2017