Is an Ex-wife a SMSF related party?
I had a phone call the other day regarding a question about an SMSF Related Party. The person asked if a SMSF can loan money to an ex-wife of a member. I must admit my first thought was you would have to be crazy! But it does pose an interesting question.
Firstly, a SMSF cannot lend money or give any other financial assistance using the fund resources to a member or relative of a member (section 65 SISA).
So who is a relative of a member?
The definition of “relative” for section 65 can be found in Section 10 of SISA. It defines “relative” as; (a) a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the individual or of his or her spouse; (b) a spouse of the individual or of any other individual referred to in (a). This is fairly wide reaching, however does not go as far to include an ex or former spouse as a SMSF related party.
Interesting section 17A of the SISA which deals with the basic conditions to be a SMSF has its own definition of “relative” (that only applies to this section) that is expanded to include (a) 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 (b) a spouse or former spouse of the individual, or of an individual referred to in paragraph (a).
As stated the definition of relative for section 65 does not include ex or former spouse therefore the fund is allowed to make the loan under this section. So, what else do we need to look out for?
Would the loan to the ex-wife be an In-house asset?
The in-house asset rules have a wider catchment than “relative” and have a term called “related party”. Again section 10 of SISA includes this definition; “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 (a) or (b).
Note: a standard employer sponsor is an employer that has entered into an agreement to make regular contributions to the fund. Also generally speaking, a Part 8 associates are those entities that are relatives of the individual, partners, companies, that are controlled or majority-owned, or entities that control the primary entity.
So again the loan to the ex-wife of the member would not be an in-house asset, unless she is a relative of the employer sponsor.
Other considerations for a SMSF related party
It needs to be considered that the ex-wife cannot be a relative of any member of the fund, otherwise she would be a SMSF related party. Therefore, so in this case if they were parents to children in their marriage, that child or children could not become members of the fund loaning the money
Also, if the loan was to go ahead it would need to be done at arm’s length.