SMSF Rules: Understanding In-House Assets
One of the central reasons for establishing a Self Managed Superannuation Fund (“SMSF”) is the flexibility they provide to their members. Investing through a SMSF allows access to a greater spectrum of asset classes, such as direct property, unlisted private companies and trusts, collectables and more. These are not always offered by industry/retail superannuation funds.
Given this flexibility, regulations exist to ensure that the primary (sole) purpose of investing through an SMSF is to provide for the member’s retirement. The rules relating to in house assets seek to ensure that SMSFs do not over invest in assets that are ultimately controlled by its members, or related parties of the members.
The in-house asset provisions cover any investment in a related party, a loan to a related party or a lease of an SMSF asset to a related party. These assets are known as “in-house assets”. Related parties are defined broadly, subject to certain exemptions, as covering the actual SMSF members and their relatives, the member’s employer, business partners and companies and trusts controlled by the members.
Based on market values as at 30 June, there is a limit of 5% of a fund’s assets which can be in-house assets. Where the fund breaches this amount, it must have immediate written plans to ensure the fund does not remain in breach. This can be particularly challenging if the in-house asset is not liquid or there are other issues in selling down the investment.
Breaches must be reported to the ATO by the auditor of the SMSF.
There are a number of exemptions contained in the law that carve out certain investments that would otherwise be caught by the in-house asset rules. The most commonly utilised exemption is for investments in business real property (e.g. an office or warehouse) that are leased at market rates to a related party. For example, an office acquired by a SMSF that is leased to the member’s employer who conducts a business from the premises is exempt from the 5% in-house asset threshold.
The in-house asset rules are just one of a group of anti-avoidance type legislation involving SMSF investments. Care should be taken when making any investment decisions so as to not foul the in-house asset, or other related party investment provisions.
ESV is experienced in navigating the complex SMSF provisions. If you have any queries in relation in-house assets or SMSFs generally, please do not hesitate to contact us or call your ESV engagement partner on 02 9283 1666.
Article by Geoff Tierney