SMSFs and the In-House Assets Test
25/11/2015 Mark Bennetts, Senior Financial Adviser, bdhSterling
When the Trustee of a Self Managed Superannuation Fund (SMSF) wishes to make an investment, particular care is required when the transaction is with a person or entity connected to the SMSF to ensure that the in-house asset test is not breached.
What Are In-House Assets?
The Superannuation Industry (Supervision) Act 1993 (SIS) states that a superannuation fund must not have more than 5% of its total funds invested in “in-house assets”.
An in-house asset is any one of the following:
- A loan made by a Trustee of a SMSF to a related party. The term “loan” includes arrangements where debt repayments are deferred, such as instalment payment arrangements, and where assets are sold on credit. Arrangements lacking an “investment purpose”, such as an interest free loan, would also be considered to be a loan.
- An investment in a related party.
- An asset of a SMSF that is leased to a related party.
Exceptions to the In-House Assets Rules
There are a variety of transactions that are specifically excluded from the in-house assets test including:
- Listed Investments - Investments listed on an approved exchange such as the Australian Stock Exchange (ASX).Typically this would include shares, listed property trusts, exchange trade funds (ETF), and some bonds etc.
- Widely Held Unit Trust - Investment in a unit trust with at least 20 unrelated unit holders who have at least the fixed right of entitlement to 75% or more of the trust’s income or capital. This type of trust is known as a “widely held unit trust” and a managed fund would be a common example.
- Business Real Property - Commercial property such as a factory, warehouse, or Doctors surgery. Known as “business real property,” this asset may leased to any person or entity, irrespective of their relationship with the SMSF, but it must be used only for business purposes
- Some Non-Geared Unit Trusts or Companies - Certain investments in related non-geared unit trusts or companies that meet a range of strict requirements that prevent: running a business, borrowing, lending, using a trust asset for loan security, and holding an interest in another entity. The trust is also restricted in acquiring assets from a related party of the SMSF.
- 5% Threshold Not reached - If the 5% in-house assets test threshold is not exceeded an asset may be acquired from a related party of an SMSF without consequence.
- “Grandfathered” Investments - In recent years, legislation has been enacted that prevents the use of various investments and arrangements but allows their retention as many were difficult to reverse. Typical examples would be SMSF investments, loans, and leases that were established before the 11th of August 1999 that involved a related party of the SMSF.
- ATO Allows - Any assets specifically deemed not to be an in-house asset by the ATO.
Generally speaking, a related party is a person or entity (such as a partnership, company, or trust) that has a connection to the Trustees and members of a SMSF.
Within the SIS legislation, a related party is defined as any of the following:
- A member of the fund.
- An employer sponsor – Where an employer contributes to a superannuation fund they have selected, and where they have an “arrangement” with its Trustees. An industry or company superannuation fund would be a typical example of an employer-sponsored fund. In certain circumstances, the ATO may determine that an entity is a standard employer-sponsor.
- A “Part 8 Associate” - A Part 8 associate is a complex concept which has been summarised by the ATO as including, but not limited to, relatives, partners, related trusts, and companies where the members or their associates have a significant influence and majority voting interest.
- A “Part 8 Associate” - A Part 8 associate is a complex concept which has been summarised by the ATO as including, but not limited to, relatives, partners, related trusts, and companies
Penalties for Breaches of the In-House Assets Test
Breaches of the in-house asset test can lead to quite severe penalties for the SMSF Trustee and may also result in substantial tax liabilities if the SMSF is deemed to be non-compliant.
- If the breach is clearly not intentional, or is due to exceeding the in-house assets test threshold of 5% by a small amount, the ATO may view the matter favourably. In this case, the Trustee may simply be required to rectify the situation.
- The ATO will not be “understanding” if the breach is significant or deliberate and the Trustee of the SMSF could be fined or even imprisoned.
- Should a Trustee of a SMSF try to avoid the in-house asset test by entering into a scheme designed to mask or understate the value of in-house assets, they may find themselves subject to the ATO’s anti-avoidance measures.
A Simple Example
Mark and Michelle own a residential investment property in joint names and they wish to transfer it to their SMSF. As Mark and Michelle are Trustees and members of their SMSF, they are unable to transfer the residential investment property to the SMSF as the owners of the property (Mark and Michelle) are related parties to the SMSF.
If Mark and Michelle decided instead to transfer their commercial property to their SMSF, this would be allowable as the commercial property is not counted as an in-house asset as it is “business real property” and specifically exempted.
Generally speaking, if a Trustee wishes to purchase an investment from a total stranger at commercial rates, there will not be any problems with the in-house assets test. If, however, the Trustee is transacting with a person or entity that is connected in some way to the SMSF, then considerable care is required to ensure that unpleasant penalties do not occur.
Disclaimer: bdhSterling works in partnership with The Hopkins Group and is a specialist provider of cross border financial solutions between the UK and Australia.
bdhSterling Pty Ltd and John Hopkins Financial Services Pty Ltd is a Corporate Representative of WealthSure Financial Services Pty Ltd Level 1 190 Stirling Street PERTH WA 6000 ACN:130 288 578 AFSL: 326450.
General Advice Warning: This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information.
Any tax advice provided in this document is incidental to the financial advice provided, being unaware of, nor able to consider all aspects of your tax affairs. You should consult your own tax professional to confirm any tax advice provided is appropriate with regards to your total tax planning needs.
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