Thank you very kindly in relation to your comments. My inclination is that the investments are not related party given the director mix, and therefore resigning as a director really has no effect which was my concern. I will be able to draft some commentary in the mangement letter - thanks again for your help. Regards Grant.

Hi Grant

It is possible that a SMSF could invest 20% into a company & the member be 1 of 5 directors and that company not be a related party to the SMSF.

A company will be an "in-house" asset to a SMSF when the members and their associates majority own or control it. Majority own is when more than 50% is owned by the members and their associates.

Examples of how the "in-house" asset definition works is found at SMSFR 2009/4 - SMSF's: the meaning of asset, loan, investment in, lease and lease arrangement in the definition of inhouse asset in the SIS Act 1993.

Refer for guidance from this ruling:

"Example 9 - Company a related party of an SMSF

144. Ken and Deidre are members of an SMSF.

145. An analysis of the relationship is required to determine if the investment is in a company that is a Part 8 associate of Ken or Deidre.

146. Ken is appointed the managing director on the board of the company and in his role the majority of the directors of the company act within the directions of Ken.

147. The company is a Part 8 associate of the individual member of the SMSF as Ken sufficiently influences the company.

148. An entity or entities hold a majority voting interest in a company if the entity or entities are in a position to cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of the company.

Example 10 - Company a related party of an SMSF

149. Ashley is a member of an SMSF. The SMSF has a lease arrangement with a company in which Ashley holds a 30% voting interest.

150. Ashley is also a member of a partnership with Mike and Leonie. Therefore Mike and Leonie are Part 8 associates of Ashley.

151. Mike and Leonie both hold a 15% voting interest in the company. Consequently, although Ashley only holds 30% of the voting interests in the company, together with his Part 8 associates, Mike and Leonie, they hold a voting interest of 60% in the company. As a result, the company is a related party of the SMSF."

If the company is deemed to be a related party the SMSF can only invest / lend up to 5% of the Fund's assets in that company (under the in-house asset rules).

If the company is a related party to the SMSF my concern is that SIS section 82(4) states that if the in-house asset amount of 5% is exceeded at the end of a financial year then the trustees must ensure that:

"(a) one or more of the fund’s in‑house assets held at the end of that year of income are disposed of during the next following year of income; and

(b) the value of the assets so disposed of is equal to or more than the excess amount."

My reading of SIS is that the shares / loans must be "disposed of" so the 5% amount is not exceeded (even though they are no longer in-house assets after the member resigns as a director).

Given the wording of the legislation I would recommend the trustees obtain legal advice as to what they are required to do or request a private binding ruling from the ATO in relation to the "in-house" assets.

A further issue is that it could be argued that the Fund has to dispose of the "in-house" assets to get them to 5% or less however at a later date the Fund could invest or lend to the company on the basis that the company is now no longer a related party to the Fund.

If other auditors have a view as to their interpretation of the SIS legislation in this example it would be great to hear.

Thanks

SMSF AAA