A structured guide to the questions every prospective SMSF owner must answer first

SONAS WEALTH  |  THE SMSF COACH

SMSF TRUSTEE EDUCATION SERIES

By Liam Shorte  |  Fellow SMSF Specialist Advisor™  |  Financial Planner

⚖️  General Advice Disclaimer This article is general information only and does not constitute personal financial, legal or tax advice. The rules governing SMSFs are complex and individual circumstances vary significantly. You should obtain advice from a licensed financial adviser before acting on anything in this article. The author holds AFSL authorisation through Sonas Wealth Pty Ltd, corporate authorised representative of Viridian Advisory 476223.

Here is a little-known strategy where an SMSF can be involved in owning a business or property through an unrelated unit trust or company structure. This is often ideal for an early-stage business expected to grow rapidly over time where income and growth can be captured tax effectively in the SMSF. Most suited to those who do not need access to the capital and profits until retirement or where you want some in the SMSF and some personally but your shared ownership, between your related parties, does not exceed 50%.

When two unrelated SMSFs co-invest in a trading company, the result can be a genuinely tax-efficient, asset-protected business structure — but it comes with a set of compliance obligations that every trustee needs to understand before proceeding. This guide explains how the structure works, the critical questions to ask, and the key risks to manage. In many cases three unrelated parties can make it a lot less risky in terms of potential SIS law breaches.

The critical first question: is the company a “related party”?

This is the most important compliance question in the entire structure, and the answer determines almost everything else.

Under the SIS Act, a “related party” of your SMSF includes the fund’s members, their relatives, their business partners, and companies or trusts they control. Control means holding the ability to determine more than 50% of the voting rights, or being entitled to more than 50% of dividends or capital. I have a complete article on Related Parties here

With a genuine 50/50 split between two unrelated SMSFs, neither fund’s members control the company outright. Neither party can determine outcomes alone. Accordingly, the company is generally not a related party of either SMSF — and this single fact unlocks the structure. So you can see that 3 unrelated entities will roughly even ownership would make this  safer as less chance of one exceeding 50%.

Thinking About an SMSF — or Want a Second Opinion? If you’d like a no-obligation conversation about whether an SMSF is right for your situation — or you want a straight-talking second opinion on an offer you’ve received — reach out. That’s what The SMSF Coach is here for. http://www.smsfcoach.com.au  |  Sonas Wealth, Sydney www.sonaswealth.com.au

In-house assets — does the 5% rule apply?

SMSF trustees are familiar with the rule that no more than 5% of a fund’s total assets can be “in-house assets” — generally, investments in or loans to related parties. Because the trading company is not a related party (as established above), the shares your SMSF holds do not count as in-house assets based on the ownership relationship alone.

One important note: Regulation 13.22C provides a separate exclusion from the in-house asset definition for investments in certain closely held entities — but that exclusion is only available if the entity does not conduct a business. Since we are dealing with an actively trading company, Reg 13.22C is irrelevant here. The correct answer is that the company is simply not a related party, so the in-house asset classification does not arise in the first place. Here is a great white paper from Leigh Mansell of Heffron’s on In-house Assets

Tax treatment — where the real advantage lives

This structure can be exceptionally tax-efficient, particularly for SMSF members approaching or in retirement phase.

At the company level: A small trading company with turnover below $50 million will typically qualify as a base rate entity and pay company tax at 25%. This tax gives rise to franking credits attached to any dividends paid to shareholders.

At the SMSF level — accumulation phase: Your fund’s effective tax rate on investment income is 15%. When the company pays a franked dividend, the SMSF includes the grossed-up dividend in its assessable income, pays 15% tax, and offsets that liability with the franking credit. Because the company already paid 25% tax, the franking credit typically exceeds the SMSF’s liability — producing a refund.

At the SMSF level — pension phase: If your SMSF is paying pensions and the income qualifies as exempt current pension income, the effective tax rate is 0%. The full franking credit is refunded in cash, making this one of the most tax-efficient investment structures available in Australia.

NALI and arm’s length dealings

Non-arm’s length income (NALI) is taxed in your SMSF at a flat 45%, regardless of whether you are in accumulation or pension phase. Private company dividends are a known NALI risk area, and the ATO scrutinises them carefully.

All dividends must be paid on the same terms to both SMSFs, proportionate to their respective shareholdings, with no preferential treatment flowing to one fund over the other. Arm’s length requirements also apply to any other dealings between your SMSF and the company — including director salaries, lease arrangements, and any services the company provides.

Annual valuation — a compliance obligation you cannot defer

Your SMSF’s financial statements must record all assets at their true market value as at 30 June each year. Shares in a private unlisted trading company must be independently valued by a suitably qualified person using a recognised methodology — typically earnings-based, net tangible assets, or a combination of both. This is not optional; your auditor will require appropriate evidence.

Valuation complexity increases over time, particularly if the company retains significant profits, acquires assets, or if the trading environment changes materially. Factor in the annual cost of a formal valuation — and the management time required to facilitate it — when assessing the overall economics of the structure. My guide to SMSF asset valuations is available here

Before you proceed — a practical checklist

Confirm each of the following before shares are acquired:

1. Both SMSFs are genuinely unrelated — members are not relatives, business partners, or Part 8 associates of each other in any way
2. A properly drafted shareholders agreement is executed before shares are acquired
3. The SMSF investment strategy is updated to specifically contemplate and justify an investment of this type, size, and risk profile
4. The share acquisition occurs at market value from day one — a below-market acquisition creates permanent NALI taint on all future income from those shares
5. Dividends will be declared on identical terms for both SMSFs from the outset
6. An annual independent valuation process is established and budgeted for
7. The company has a separate ABN, ACN, and bank account entirely independent of any member’s personal finances
8. Any member who is also a director or employee of the company is remunerated at genuine market rates
9. Legal advice has been obtained on both the company establishment and the SMSF’s acquisition of shares
10. Your SMSF auditor has been informed of the investment and understands the basis on which it is not classified as an in-house asset

Always make sure that you’re your strategy complies with relevant superannuation and tax regulations before implementation

Are you looking for advisors that will keep you up to date and provide guidance and tips like in this blog? then why not contact us at our Castle Hill or Windsor office in North West Sydney to arrange a one-on-one consultation, just click the Schedule Now button up on the left to find the appointment options.

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Liam Shorte B.Bus FSSA™ AFP

Financial Planner & Fellow SMSF Specialist Advisor™

      

Tel: 02 9899 3693, Mobile: 0413 936 299

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Important information

This article is general information only and does not constitute personal financial, legal, or taxation advice. The rules governing self-managed superannuation funds are complex and fact-specific. Individual circumstances vary significantly, and the application of the rules described in this guide depends on facts that can only be properly assessed by a qualified professional. Before establishing or participating in a structure of this type, seek advice from a licensed SMSF adviser and an experienced tax lawyer. Past tax outcomes are not a guide to future tax treatment.