While a SMSF cannot lend money to a member or relative of the fund, it is possible for a loan to exist with a related party of the member. Similarly the SMSF can invest into a related party of the fund. The proviso is that the value of all such related party transactions doesn't exceed 5% of the total value of the fund. Tread carefully, because a mistake may not be easily remedied.
An Overview of in-house Assets
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."
So basically it 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. 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. The only problem is that this would be an in-house asset.
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. 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%. Alternatively, if something were to happen to the relative value of in-house assets already held, and this cause 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.
Note that 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 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. It was surprising therefore when the ATO came out and said in response to the GFC that they would not require a sale (in the 08/09 financial year) if the SMSF were able to bring the level back into compliance during the following year. This is clearly not what the law says, and we don't feel it would be wise to rely on that leniency being repeated.
This system of allowing but limiting in-house assets within an SMSF has worked well from a practitioner's perspective for many years. However, the Cooper review has recommended the banning of in-house assets of any sort and it seems to be recommendation the current government is in favour of. We shall have to wait and see what gets through parliament.
