SMSFs can face situational traps affecting related-party transactions with former spouse

SMSFs will need to take a more cautious approach when managing related-party transactions especially around a former spouse, as several traps may arise due to situational changes when considering the application of super laws, according to a law firm.


Townsends Lawyers superannuation leader Jeff Song said that trustees should not assume that a member’s ex-spouse or other non-relatives such as distant family members or friends are not related parties of the fund, but should seek professional advice when considering any transactions with any of them.

He noted it was important to consider the compliance impacts relevant in situations where the transacting party is a distant relative (i.e. cousin) or a friend who isn’t included in the definition of “relative” under the Superannuation Industry (Supervision) Act 1993 (Cth) (“the SIS Act”).

The SIS Act contains two slightly different definitions of a “relative” – one in s10 and the other in s17A, according to Mr Song.

The definition in s17A adopts a wider definition which includes “former spouse” (and cousins) as a relative, but this definition is not relevant for the purpose of determining if there is any prohibited loan or financial assistance to a member’s relative under s65 of the SIS Act. 

“The relevant definition is in s10, and it doesn’t include a former spouse as a relative of the member. On the face of it then, there is no general prohibition on the fund trustee from lending money or giving financial assistance to the member’s former spouse,” Mr Song said.

“However, care needs to be taken to ensure that the transaction doesn’t give rise to an ‘indirect’ financial assistance to someone who is a relative (i.e. the member’s children). The ATO’s view as expressed in SMSFR 2008/1 is that the s65(2)(b) also encompasses any arrangement where the loan is to a non-relative but indirectly gives financial assistance to a member’s relative. 

“If the arrangement is with mutual understanding that the monies so borrowed from the fund would be used for the benefit of their children (or any other relatives of the member), arguably, there is provision of prohibited indirect financial assistance.

“This risk could be mitigated by entering into and adhering to the terms of an enforceable agreement that is appropriately drafted to restrict the use of loan amount by the borrower and otherwise note reasonable arm’s length terms between the parties.”

Issues around Part 8 Associate and in-house asset

Whether a former spouse of a member is a related party of the fund is not necessarily a simple question. Mr Song noted the SIS Act adopts a broad definition of related party and can quite easily capture a member’s ex-spouse as a related party.

An example is where the member’s superannuation interest is subject to a payment split in favour of their former spouse pursuant to a Family Law consent order. Even where the former spouse has never had a membership interest themselves (and regardless of what the trust deed or the member register of the fund says) the SIS Act and the regulations extend the definition of a member for SMSFs and deem the former spouse themselves as a member of the fund from the operative time of the splitting order.

“To avoid this situation, it is necessary to convert the former spouse’s ‘entitlement’ under the court order (or financial agreement) into a ‘superannuation interest’ for the former spouse in another superannuation fund (rollover) or cashing out the benefits to the former spouse if he/she has met an unrestricted condition of release,” Mr Song warned.

“This example highlights the importance of seeking the appropriate advice and to carefully complete the super splitting process right to the end. A Family Court order is a powerful document and it might offer a false sense of comfort that the process is over.

“Another example is where the former spouse is considered a related party due to being a partner of a partnership with the member. The SIS Act has adopted the tax law definition of partnership for IHA purposes which is broader than the general law definition of a partnership. This broader definition includes arrangements whereby two or more individuals or entities are simply in receipt of income jointly.”

Likely, the Family Law consent order would have considered and dealt with any joint investment. However, it’s again important to ensure that the parties have actually implemented the orders and no longer hold any joint investment, according to Mr Song.

For example, if an order required a jointly owned investment property to be transferred to one of them, the transfer should be effected with a conveyancer to ensure they are not considered as related parties by reason of jointly receiving investment income.

“There are, of course, many other circumstances where a former spouse could be considered a related party of the fund including via general law partnership, or involvement in the same company or a trust,” Mr Song explained.

“Any transactions would, of course, be subject to the sole purpose test and the investment strategy requirement. Trustees should not assume that a member’s ex-spouse or other non-relatives such as distant family members or friends are not related parties of the fund, but should seek professional advice when considering any transactions with any of them.”



Tony Zhang
21 September 2021



Any advice contained in this website is of a general nature only and does not take into account your circumstances or needs. You must decide if this information is suitable to your personal situation or seek advice.

Rolanda has been my financial adviser for 20 years. I have always found her to be highly intelligent, knowledgeable and professional in her career. Rolanda is accessible at all times and patiently explains terms that I do not fully understand. I can highly recommend Rolanda and it is a pleasure to do so. I do this with the utmost confidence. Marcia Montgomery (Retiree – home duties and ex-clerk with Water Board)
I retired Oct 2012, and seeking Financial Advice for my retirement funds, I decided to have Rolanda look after my financial affairs, and so happy I did. Since my retirement I am extremely comfortable with Rolanda’s advice, experience and strategies and the returns on my investments. Rolanda is my "Breath of Fresh Air" at this stage of my life and she makes herself available 24/7 should you need to talk with her. Steve Hoad (Ground Engineer, Qantas)
In 1997 I left Energy Australia and decided to join Rolanda Adams Financial Services for the financial support and advice that I would need into the future. That decision has proved a very good one and I am still with Rolanda who has given me advice and friendship over those many years. The advice given has ensured that my investments have been protected and the major losses, of some, during the GFC was not felt by me unduly. Rolanda and her team are very easy to contact at any time and one is always received in a most professional manner. I would be most happy to recommend Rolanda Adams Financial Services to all who need financial services. Graham Fleeton (Manager, Property Insurance Group Energy Australia (Ausgrid))
Rolanda has been my Adviser for the past 18 years. Through her wide industry experience and professional expertise she has ensured the sound development and ongoing management of my investments. Her advice has invariably been sound, timely and entirely tuned to meet my personal needs in retirement. She has a friendly, engaging manner and is always readily available to address any of my concerns. I have no hesitation in recommending her. Neil O'Keeffe (Chief Inspector (retired), Australian Customs Service)

© 2022 Rolanda Adams Financial Services Pty Ltd. All rights reserved. Site by PlannerWeb.