The in-house assets trap
28 August 2014
One of the pitfalls that could occur with self managed super is the laws around in house assets. The ATO defines in house assets as an asset of a super fund that is any one of the following:
- a loan to, or an investment in, a related party of the fund
- an investment in a related trust of the fund
- an asset of the fund that is subject to a lease or lease arrangement between the trustee of the fund (you) and a related party of the fund.
It apples to loans, investments and leases after August 11, 1999. The ATO also provides a list of things that are not in house assets. There are many.
It is an area where SMSF trustees need to show caution. Graeme Colley, Director, Technical and Professional Standards, of the SMSF Professionals’ Association of Australia (SPAA) warns that it is one of the most complex set of investment rules in the Superannuation Industry Supervision (SIS) legislation. It has been the cause of a significant number of breaches of the legislation. Trustees may be exposing themselves to significant penalties, or possible disqualification as a trustee.
Colley says there have been a significant number of Auditor Contravention Notices in this area. The introduction of education directions, rectification directions and administrative penalties from 1 July 2014 for SMSFs have meant a brush up of all provisions of the SIS Act and Regulations for trustees and professionals to ensure the fund meets the rules and penalties are avoided.
“For the year ended 30 June 2013 the most reported breach by number were loan requirements at 21.3%, with breaches of the in-house asset rules coming a close second at 18.3%," he says. "However, by value, the in-house asset breaches accounted for 28.3% of all breaches. These percentages signal that many trustees and their advisors do not have an understanding of the in-house assets or the fund is not administered as required by the SIS legislation."
Colley says the in-house assets require a superannuation fund to manage the investments of the fund so that the market value of its in-house assets does not exceed 5% of the fund’s total assets at market value.
“The trustees of the superannuation fund must ensure they do not acquire, by purchase or transfer, an in-house asset unless the fund will continue to meet the 5% limit after the acquisition.
“At the end of a financial year the trustees are also required to measure the percentage of the fund’s in-house assets and if the 5% market value test has been exceeded at that time the trustees must put in place a plan by the end of the next financial year and dispose, by sale or transfer, of assets to ensure the fund corrects the position and the in-house asset percentage is no more than 5% of the fund’s assets by market value.”
The ATO issue a number of publications and rulings from the ATO to assist in understanding the operation of the in-house asset rules. Colley says advisers need to be well informed and trustees need to get specialist advice.