One of the most important rules that an SMSF must comply with is the ‘in-house assets’ rule, which states that the amount of a fund’s in-house assets must not exceed 5% of the market value of its total assets. A breach of this rule is a breach of Section 71 of the Superannuation Industry (Supervision) Act.
This rule is tested at the end of each financial year and each time an asset is acquired.
What is an in-house asset?
An ‘in-house’ asset is:
- a loan to, or an investment in, a related party of the fund; or
- an investment in a related trust of the fund; or
- an asset of the fund subject to lease or lease arrangement between the trustee of the fund and a related party of the fund other than an asset which is excepted under the Act.
For example, if Peter Jones is a trustee of the Jones Family Superannuation Fund, a loan by his SMSF to a company controlled by Peter Jones would be considered to be an ‘in-house’ asset.
Who is a related party
The definition of a ‘related party’ is very broad and exhaustive, and covers:
- a member of the fund;
- a standard employer sponsor of the fund; and
- an associate of either a member or standard employer sponsor of the fund.
Associates include:
- any relative of the member (spouse, parent, grandparent, uncle, aunt, nephew, niece, son, daughter, adopted child, or spouse of any relative in this list);
- the other members of the fund;
- a business partner of the individual or a partnership in which the individual is a member, and in the case of the former, the spouse or child of that partner;
- a trustee of a trust controlled by the individual;
- a company sufficiently influenced by, or in which a majority voting interest is held by the individual and/or the individual’s associates.
In the case of a company, exerting ‘sufficient influence’ means that the company is accustomed or under formal or informal obligation, or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the individual.
For a trust, control is defined to be holding a fixed entitlement to more than 50% of the capital or income of the trust, exerting sufficient influence (as per a company), or the ability to remove or appoint the trustee, or a majority of the trustees, of the trust. Like companies, the individual’s associates are grouped in relation to the control test.
What assets are exempted from the rules?
The key exemption for most SMSFs is the ‘business real property’ exemption, which is a business property owned by the fund and leased to a related party of the fund. The lease or lease arrangement must be legally enforceable and conducted on an ‘arm’s length basis’. This exemption facilitates a common practice by many trustees whereby the SMSF owns their business premises, and the premises are then leased to the member or the member’s company.
Other exemptions are:
- an investment in a widely held unit trust such as a managed fund;
- a deposit with an authorised deposit taking institution;
- a life policy issued by a life insurance company (other than a life policy acquired from a member of the fund or a relative of a member);
- an investment in a pooled superannuation trust made on an arm’s length basis;
- property owned by the SMSF and a related party as tenants-in-common, other than property subject to a lease or lease arrangement between the trustee of the fund and a related party of the fund; and
- an investment in certain unit trusts or companies that meet prescribed conditions. This exemption essentially provides for as SMSF to invest in ‘business real property’ via a company or trust structure which then leases the business real property to a related party. The trust or company is prohibited from borrowing and cannot carry on a business.
Transitional Provisions
The in-house asset rules were amended with an effective date of August 11, 1999. There are a number of transitional provisions for investments and loans made that did not previously count as in-house assets.
For more information about these transitional provisions and the in-house asset rules, please refer to Superannuation Circular No. II.D.6 which is available at http://www.apra.gov.au/ [1].
To find out about other investment restrictions, read Borrowing and lending with your SMSF [2].
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.