A client has raised the question of the following scenario:
SMSF would be issued 49% of shares in a private company. The company will run a business.
The cost of the shares exceed 5% of fund assets
51% of shares will be held by the member's employer, who will control the company's business.
The SMSF Member and his boss would be a directors of the private company.
The company may end up employing the member of the SMSF.
SMSF wants to also lend money to the company
As an alternative to being issued shares, what if the SMSF purchased the shares from the member?
The main questions I have are:
Would this be an in-house asset?
If it is not an IHA, the fund could not acquire the shares from the member?
Can an SMSF invest in a company of which the member is an employee?
Thank you.
Hi Jason
The in-house asset rules are covered under section 82 - 85 of SIS.
If the company is not considered a related party under SIS (no majority ownership or control by the Fund & its related parties) the asset would not be considered an IHA.
Section 66 requires that a Fund cannot acquire assets from a related party unless the asset is:
listed shares
business real property
unlisted units or shares and the rules re ungeared entities are followed (as per SIS Regulations 13.22C & D).
As the Unit Trust is running a business the Trust will not meet the requirements of SIS Regulation 13.22C & D and cannot be acquired from a member of the Fund.
Yes a SMSF can invest in a company that the member is an employee of as long as the IHA rules are complied with. I assume the employer is not being treated as an "employer sponsor" under the Fund's trust deed.
Thanks
The Auditors Institute