Can an employee acquire a residential property as an investment in the employee’s Self Managed Superannuation Fund (SMSF), if the employer is a property developer?

Answer:  Maybe, maybe not.

This question asks whether an employee is a related party of their employer (or the employer a related party of the employee’s SMSF) for purposes of Section 71 Superannuation Industry (Supervision) Act 1993 (SISA), in respect to the In-House Asset Test and Section 66 of the SISA, in respect to the prohibition against acquiring certain assets (including residential property) from a related party.

There is no default rule that an employee is an associate of their employer.  The analysis does not, however, end at that fact.

A related party of another is defined at section 10(1) of the SISA as a member, a standard employer sponsor of the Fund, or a Part 8 Associate of either the member or the standard employer sponsor of the Fund.

Assuming the employee’s SMSF is not an employer sponsored fund, the question is whether the employer may nonetheless be a Part 8 Associate of the employee.

A Part 8 Associate is defined at section 70B of the SISA as a relative of an entity (if the employee is unrelated to the employer, no problem), a partner of the entity (if the employee is not a partner – then not a problem), a trustee of a trust for which the entity is “controlled” (if the employee has no influence over the trust, receives no income or capital, etc. – then not a problem), or if the employee has a “sufficient influence” or “majority voting interest” in the entity (this could be the area in which the test is relevant, because as an employee she may have significant influence over the conduct of the entity), or another Part 8 Associate of the employee has this influence (for example, a family member controls the employer or a related entity of the employer).

In respect to the question of “sufficient influence”, we consider section 70E of the SISA, and note that it may be the case that the employee has considerable conduct in the employer’s affairs.

For example, the employee may, for a property developer, determine the properties to be acquired and/or developed, and be charged with the derivation of investors and the profit sharing relationships.  The employee may also, in such circumstances, receive a bonus on the development projects.  The directors may rely on the employee to provide recommendations across the business.  In this case, the employee may likely have “sufficient influence” to be a related entity to his employer.  Similarly, if the employee received, as a consequence of employment, the right to demand an asset as compensation for the services to the employer, this may be “sufficient influence” to be a related party.

On the other hand, if the employer is a property developer, and the employee is a secretary with float tasks over administration matters, it is quite likely the employee has little or no influence over her employer.

The circumstances in which section 70E may apply in an employee/employer relationship are complicated and should be considered on the facts and circumstances (consider for example the relationship between employer and employee for purposes of the Fringe Benefits Tax Assessment Act 1986 (Cth)).

Provided the employee is not a Part 8 Associate (nor a related party of the employee) to the employer, then the employee may acquire assets of the employer at arm’s length and commercial terms (subject to satisfying at all times section 62 of the SISA, being the Sole Purpose Test), without restriction under the test of section 66 (restricting acquisitions of assets from members and their related parties), and section 71 (In-House Asset Test) would not apply if the asset was acquired.

Notwithstanding the above, any transaction must be compliant with section 109, with every stage of the acquisition, including any vendor finance arrangements, made on arm’s length and commercial terms.  Whilst sections 67 and 67A do not prevent an employer from lending money to an employee (subject to any restrictions posed by Division 7A of the Income Tax Assessment Act 1997), the finance arrangements (limited recourse borrowing arrangements) must be such that the vendor (employer) does not retain title over the asset pending settlement of the borrowing.

If you have any queries regarding the subject of this article, please do not hesitate to contact Katrina Brown via email or on 07 5574 3560.