Last week we considered the identification of related parties. This week we look at some related party acquisition issues.

Generally, an SMSF can only acquire unlisted shares from a member or associate if the company is related. This is because the shares would constitute in-house assets. Naturally, the acquisition would only be allowable if it did not cause the total level of in-house assets in the fund to breach 5%.

This creates a paradox. An SMSF can invest more than 5% of its assets in a company that is unrelated. Typically, this occurs when the SMSF, along with its members, collectively own no more than 50% of a company that they do not otherwise control. There is no limit to the % of SMSF assets the SMSF can invest because the investment in the unlisted company is not an in-house asset. The paradox arises because, as the share holding does not constitute an in-house asset, the shares the members own cannot be acquired from them by their SMSF. Their SMSF could acquire the shares of the other, unrelated, shareholders but care is required as, if this results in the SMSF and its members collectively breaching the 50% limit, then the whole of the SMSF’s investment in the company will become an in-house asset and be limited to 5% of the SMSF’s assets. Units in a unit trust are treated similarly. As usual, the devil is in the detail and there are exceptions to the above which will be covered in the future Snippets.