In the SISA an in-house asset of a superannuation fund is defined as:
“an asset of the fund that is a loan to, or an investment in, a related party of the fund, an investment in a related trust of the fund, or an asset of the fund subject to a lease or lease arrangement between a trustee of the fund and a related party of the fund.”
Basically this definition captures any attempt by the trustees of the fund to in some way use the money available within the superannuation fund to invest in any business, trust or company that is related to the members of the fund, or controlled by the members of the fund. In house asset rules don’t prohibit the investments being made but they will act to limit the amounts available. For example, a SMSF cannot lend to a member, as this is specifically prohibited by law, but it can lend to a member’s business if that is run through a company or trust.
Any investment that is caught by the in-house assets test, does not in and of itself cause a compliance problem, provided the level of investment stays within certain limits. The total amount of in-house assets a SMSF has at any one time must not exceed 5% of the value of the fund. Note that this is not the amount of each individual in-house asset, it is the total of all in-house assets added together. A trustee must not make a new acquisition of an in-house asset if that acquisition would cause the total of all such assets to exceed 5%. For example:
| Asset | Value | Investment Allowed? |
|---|---|---|
| Total Assets of SMSF | $1,350,000 | |
| In-house Asset 1 | $50,000 | Yes |
| In-house Asset 2 | $15,000 | Yes |
| In-house Asset 3 | $10,000 | No |
Alternatively, if something were to happen to the relative value of in-house assets already held, and this causes the total to exceed 5% at the end of a financial year, the trustees must formulate a written plan for the disposal of those assets and give effect to that plan over the following financial year.
Example:
| Year 1 | Year 2 | Year 3 | |
|---|---|---|---|
| Fund Assets | 1,350,000 | 1,450,000 | 1,260,000 |
| New In-house Assets | 25,000 | 40,000 | 0 |
| In-house Assets | 25,000 | 65,000 | 65,000 |
| In-house Asset % | 1.85% | 4.48% | 5.15% |
In this case it wasn’t that acquisition of assets that has caused a problem but the movement of asset values. Importantly, when something like this occurs the law requires assets to be sold. It is not enough to simply find that through contributions or the market movement in asset values, that the relative value of in-house assets are no longer over the acceptable level. Once the problem exists, it requires that assets equal in value to the excess amount be sold. Through the GFC the ATO has taken a very liberal view of these provisions and allowed for in-house asset problems to be overcome by means other than asset sales provided the SMSF were able to bring the level back into compliance during the following year. The problem with relying on this however is that in our opinion this approach is quite clearly not what the law says.
The whole issue of SMSFs and in-house assets was called into question by the Cooper review, where it was recommended that in-house assets of any sort be banned. For the time being, this doesn’t appear to be an approach adopted by the Government unless the items are personal use assets.
This system of allowing but limiting in-house assets within an SMSF has worked well from a practitioner’s perspective for many years. It provides a degree of flexibility without allowing for abuse. Hopefully it is a system that will remain.
