Thursday, March 31, 2022

Related-Party Asset

I have been trying to invest in a fund on the AngelList venture capital platform. But my SMSF administrator flagged that there might be issues because the fund is organized as a limited partnership. The auditor has now provided the following information:

"A partnership can elect to be taxed as a Limited Liability Company (LLC) in USA or a partnership under the tax law due to the elections that the LLCs make with the US Internal Revenue Office. It is common for such partnerships (US) to be taxed as a company.

To support compliance with SISA/SISR for investments in Limited partnerships we note the following potential scenarios and information for audit purposes:

  1. Where the entity is taxed as an LLC, this supports that the LP should be treated as a company where the members of the Fund are not members of the LP and the investment therefore is considered as an investment in an unrelated entity. This is usually able to be ascertained from the financial report of the LP. 
  2. Where the entity is taxed as an LP, and the members of the fund are not members of the LP, and the investment is in within a limited capital account arrangement. This is usually able to be ascertained from the financial report and the application agreements. 
  3. Where the entity is taxed as an LP, and the members of the fund are members of the LP.

If the investment falls into scenario 2 and 3 then the investment would classified as an in-house asset which would mean it needs to be below 5% of the SMSF’s total assets."

It seems that this falls under scenario 3. I just sent AngelList an email to check. The problem is that the minimum investment required, let alone subsequent hoped for appreciation, would take us over the 5% limit. So, it seems it is not really true that you can invest in anything you like through an SMSF. It seems silly to me to treat a fund where I am only investing through the SMSF along with 1500 other investors as a "related-party asset". Probably, I will need to invest in this fund using my own name and pay higher tax than I would through the SMSF.

3 comments:

enoughwealth@yahoo.com said...

Best to play it safe with SMSF investments that might fall foul of some of the the more convoluted or esoteric superannuation law, as getting a determination that your SMSF is not a complying superannuation fund has quite horrendous tax consequences, and can't be retrospectively fixed, even if the breach was for a trivial dollar amount it can impact the tax treatment of the entire SMSF.

Phrases such as "this is USUALLY able to be ASCERTAINED from the financial report of the LP" rings all sorts of alarm bells. You would be taking a gamble on how the financial report might change in future years, how the investment may increase as a relative proportion of your SMSF total balance, and also how the ATO lawyers may ASCERTAIN (decide) whether it falls into scenario 1, 2 or 3.

mOOm said...

Thanks for this advice. It seems crazy that this could be considered a related party asset...

mOOm said...

So seems the problem is: "Entities or individuals that are unrelated and form a partnership with an SMSF with the same intention then become, by definition, Part 8 associates. "

https://www.smsfadviser.com/strategy/15390-keeping-smsf-property-partnerships-compliant