Related Party Transactions: What Small Businesses Need To Know To Stay Compliant

Related party transactions are common in Australian small businesses - especially in family-run companies and startups where founders wear multiple hats. You might rent a warehouse owned by a director’s family trust, buy services from a co-founder’s other company, or make a short-term loan to the business to manage cash flow.

Handled well, these arrangements can be efficient and perfectly lawful. Handled poorly, they can create conflicts, attract regulatory attention, and undermine trust with investors and stakeholders.

In this guide, we’ll explain what counts as a related party transaction, when approvals and disclosures are required, and practical steps to document your arrangements properly. We’ll also outline the key legal documents that help keep you compliant and protect your business as it grows.

What Is A Related Party Transaction?

At a simple level, a related party transaction is any financial dealing between your business and someone connected to it. In a small business context, that often includes:

• Buying or selling goods and services with a company owned or controlled by a director, founder or their relatives
• Loans to or from directors, shareholders, employees, or their family members
• Leasing office or equipment from a director, family member, or an entity they control
• Transferring assets (for example, selling a vehicle) between your company and a related person or entity

Common related parties include:

• Directors and officers, and their close family members (spouse/partner, children, parents)
• Shareholders with significant influence or control (and entities they control)
• Entities your business controls, or that are commonly controlled by the same people (for example, a founder’s other company)

In practice, this means the day‑to‑day deals you do with founders, family and sister companies can be “related party transactions” - even when they feel routine.

Why Do Related Party Transactions Matter?

Related party transactions are lawful when managed transparently and on fair terms. The compliance focus is about avoiding conflicts of interest and protecting the company as a whole (including minority shareholders and investors). If they’re mishandled, risks include:

• Governance and regulatory issues: Poorly documented or unfair arrangements can trigger scrutiny from regulators, especially around director duties and company records.
• Shareholder disputes: Minority shareholders may allege unfair preference or undisclosed benefits to insiders.
• Tax consequences: Non‑commercial terms can attract ATO attention. For example, loans from a private company to shareholders may be caught by Division 7A rules if not structured correctly, and benefits to employees may raise fringe benefits tax issues.
• Trust and deal fatigue: Investors, lenders and buyers expect clean, arm’s length documentation. Opaque related party dealings can delay or sink funding and sale processes.

The good news: a simple framework of identification, disclosure, arm’s length terms and good records goes a long way to keeping you on track.

Which Australian Laws Apply?

Several legal and accounting frameworks shape how small businesses should approach related party transactions. Here are the key ones to understand.

Corporations Act 2001 (Cth)

• Director interests (s191): Directors must disclose any material personal interest in a matter that relates to the company, subject to limited exceptions. Record these disclosures in board minutes.
• Voting by interested directors (s195): The restriction on directors voting where they have a material personal interest applies to public companies. Proprietary companies are generally exempt unless their constitution says otherwise.
• Related party benefits (Chapter 2E): Shareholder approval requirements mainly apply to public companies and entities they control. Most proprietary (Pty Ltd) companies are outside Chapter 2E unless they are controlled by a public company.
• General director duties (ss180–184): Directors must act with care and diligence, in good faith and in the best interests of the company, and not misuse their position or information. These duties sit behind every related party decision.

If control is relevant to your group structure, it’s worth clarifying how “control” is understood under the Corporations Act in the context of approvals and disclosures. You can read more about control under the Corporations Act in our guide.

Financial Reporting – AASB 124 Related Party Disclosures

If your company prepares general purpose financial statements, Australian Accounting Standard AASB 124 requires disclosure of related party relationships and transactions (including key management compensation) in your financial statements. Even where AASB 124 doesn’t apply, maintaining a clear internal record strengthens governance and supports future due diligence.

ASIC Oversight

ASIC (the corporate regulator) expects fair dealing and proper records. Closely held proprietary companies have flexibility, but poor documentation or non‑commercial terms can become a problem - particularly if you later raise funds, bring in external shareholders or prepare for sale.

Tax Settings (High Level)

Tax outcomes depend on the nature of the transaction. Two common pressure points are:

• Division 7A: Loans or payments from a private company to shareholders or their associates can be treated as deemed dividends unless documented on compliant terms.
• Arm’s length pricing: The ATO may adjust tax outcomes where amounts charged between related parties aren’t commercial. Benefits to employees may also trigger fringe benefits tax.

Tax treatment is highly fact‑specific, so it’s wise to get tailored accounting or tax advice alongside your legal documents.

How Do You Keep Related Party Deals Compliant?

A practical, step‑by‑step framework will keep your business on the front foot.

1) Identify Related Parties Early

Maintain a simple register of directors, senior managers, key shareholders and entities they control (including family trusts and companies). Review new suppliers, leases and loans against this register so you can spot a related party situation before terms are agreed.

2) Disclose Interests And Manage Conflicts

Ensure directors disclose any material personal interest to the board and that it’s recorded in the minutes. If your Conflict Of Interest Policy sets out a clear process (including when a director steps out of deliberations), follow it consistently. For public companies (and controlled entities), consider Chapter 2E approval requirements; proprietary companies should still adopt strong governance practices even when not strictly required.

3) Use Arm’s Length Terms

Negotiate terms as if you were dealing with an independent third party: market price, fair milestones, realistic payment terms, appropriate interest rates and security for loans. For bigger or unusual deals, consider an independent valuation or third‑party quotes.

4) Put It In Writing

Confirm the arrangement in a signed agreement. For example, document services through a clear Service Agreement, rentals through a lease, and loans through a formal Loan Agreement. If funds flow from a director or shareholder, it’s helpful to understand how a director loan works and whether security (for example, a General Security Agreement) makes sense. Where security is used, consider registering it on the PPSR - our overview of the PPSR and why it matters explains the benefits.

5) Approve And Minute Decisions

Record board deliberations, disclosures and approvals in minutes. For shareholder approvals (where required), prepare the notice, explanatory materials and resolution. Keeping a consistent paper trail - even when approvals aren’t legally mandated - demonstrates good governance. Templates like a Director’s Resolution help you standardise the process.

6) Keep Clean Records And Consider Reporting

Maintain a central file with the agreement, valuations or quotes, and meeting minutes. If you prepare general purpose financial statements, work with your accountant to address AASB 124 related party disclosures.

7) Review Periodically

As your business grows, revisit related party arrangements to confirm pricing and terms remain commercial. If a transaction changes in scope or scale, refresh approvals and documentation.

What Documents Should You Put In Place?

Well‑drafted agreements and simple governance tools will reduce risk and make approvals faster. Consider the following:

• Service Agreement: Sets out scope, deliverables, fees, IP and liability where a related company provides services. A clear Service Agreement helps prove the terms are arm’s length.
• Loan Agreement (and security if needed): Records principal, interest, repayment schedule, events of default and security. A documented Loan Agreement supports governance and tax compliance, and a General Security Agreement can protect the lender.
• Lease: For premises or equipment, use a formal lease with market rent reviews, maintenance responsibilities and options to renew. Minute the decision and retain any rent appraisals or quotes.
• Shareholders Agreement: Sets expectations around decision‑making, conflicts, approvals and information rights. A robust Shareholders Agreement can require disclosure of related party interests and set thresholds for board or shareholder approval.
• Company Constitution: Your constitution can address voting on conflicts and approval mechanics for certain transactions. If you need to update or adopt one, consider a tailored Company Constitution.
• Conflict Of Interest Policy: A practical policy that requires declarations and outlines how conflicts are managed by the board. See Conflict Of Interest Policy.
• Board And Shareholder Resolutions: Keep a consistent format to capture disclosures, abstentions and approvals. A Director’s Resolution template can streamline this step.

Not every business will need every document. Focus on the agreements that match the transactions you’re actually doing, and make sure they’re drafted for your specific circumstances.

Key Takeaways

• Related party transactions are common in Australian small businesses - the key is to manage them transparently and on arm’s length terms.
• Chapter 2E shareholder approval rules apply mainly to public companies (and entities they control); proprietary companies should still follow strong governance, director interest disclosures and good record‑keeping.
• If you prepare general purpose financial statements, AASB 124 requires disclosures of related party relationships and transactions.
• Document arrangements in writing (for example, a Service Agreement, Lease or Loan Agreement), minute board decisions and keep evidence of market pricing.
• Be mindful of tax settings (such as Division 7A for private company loans) and seek tailored accounting advice alongside your legal documents.
• Set expectations up front with tools like a Shareholders Agreement, Company Constitution and a practical Conflict Of Interest Policy.

If you’d like a consultation on managing related party transactions in your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.