Several issues need to be considered when devising an SMSF investment strategy, including the superannuation investment rules. One of these issues includes the substantial distinction that can be drawn between an ‘in-house asset’ and a ‘related party investment’.
An ‘in-house asset’ is an asset of the fund that is a loan to, an investment in or a lease with a related party of the SMSF.
A ‘related party investment’ is also an asset of the fund that is a loan to, an investment in or a lease with a related party of the SMSF that meets one of the exceptions of the ‘in-house asset’ rules.
They seem similar, but one is in fact a subset of the other and the distinction is relevant because a fund is not permitted to invest more than 5% of its capital in an ‘in-house asset’, whereas no such cap applies to a ‘related party investment’.
So, when is a ‘related party investment’ not an ‘in-house asset’? That is, what are the exceptions to the ‘in-house asset’ rules?
Some of the most common exceptions to the ‘in-house asset’ rules include:
- a life policy issued by a life insurance company, but not a life policy acquired from a member of the SMSF or a relative of a member;
- an investment in a pooled superannuation trust made on an ‘arm’s length’ basis;
- real property subject to a lease, or to a lease arrangement enforceable by legal proceedings, between the trustee of the fund and a related party of the fund, if the property is business real property of the fund throughout the term of the lease or lease arrangement;
- an investment in a widely held unit trust;
- a unit trust in which the unitholders have fixed entitlements to all of the income and capital of the trust and fewer than 20 entities between them do not have fixed entitlements to 75% or more of the income or capital of the trust;
- property owned by the fund 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.
In addition, an SMSF is able to invest in a unit trust or a company without that investment being considered an in-house asset if certain conditions are met. The main conditions include, but are not limited to, the unit trust or company not acquiring an asset from a related party of the fund other than business real property, do not directly or indirectly lease assets to related parties other than business real property and do not conduct a business.
For example
Mr and Mrs Brown have set up an SMSF in which they are the members and trustees. The Fund has $70,000 in cash and, as Trustees, they would like to use that to buy a one-third interest in a residential property in Byron Bay used for holiday letting.
As individuals, Mr and Mrs Brown will own the remaining two-thirds of the property and they plan to borrow money to fund this purchase using their private residence as security.
Mr and Mrs Brown want to use the holiday property when it’s not being rented. However, it will be available to rent for the whole year.
What areas of concern would you have to consider for the purposes of this example in relation to the ‘in-house asset’ restrictions?
The SMSF and Mr and Mrs Brown can invest as tenants in common in a residential property because it falls within one of the exceptions of an ‘in-house asset’. The property would need to be bought from an unrelated party.
However, they or any related party would not be permitted to rent or reside in the property otherwise it would constitute an ‘in-house asset’. The ‘in-house asset’ rule is a day-by-day test and any stay by Mr and Mrs Brown or a related party would require the Trustees to include the full market value of the property as an in-house asset of the Fund. If the market value exceeds the 5% rule, then the Trustees are in breach of the ‘in-house asset’ rules.
Andrew Bloore is the chief executive officer of SuperIQ.
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.
