One of the main reasons to set up an self managed super fund (SMSF) is the ability to invest in a wide range of assets. A member is able to invest in shares, managed funds and term deposits. Investments in more “exotic” items including collectibles or art may also be possible allowing members to have more control and flexibility as to where their super benefits are invested. But there are plenty of rules that trustees need to comply with, particularly when it comes to in-house assets.
The first question that needs to be asked when acquiring an asset for the fund is who the asset is being acquired from? The trustees of SMSFs in general are prohibited from acquiring assets from related parties of the SMSF.
However, there are several exceptions to the rule against acquiring assets from related parties. These include:
- the asset is a listed security (for example, shares, units or bonds listed on an approved stock exchange) and the asset is acquired at market value,
- the asset is business real property and acquired at market value, and
- the asset is an in-house asset, but the level of your fund’s in-house assets does not exceed the threshold for SMSFs of a maximum 5% of total fund assets, or is an asset specifically excluded from being an in-house asset.
A related party of a fund includes all members of your fund and their associates, as well as all standard employer-sponsors of your fund and their associates.
In-house assets
An in-house asset is an asset of the fund that is a loan to, or an investment in, or a lease with a related party of the fund.
A ‘related party investment’ is also an asset of the fund that is a loan to, an investment in, or lease with a related party of the fund, but it also meets one of the exceptions of the in-house asset rules (see below).
While they seem similar, and one is in fact a subset of the other, the distinction is relevant because a fund is not permitted to invest more than 5% of its capital in an in-house aAsset whereas no such cap applies to a ‘related party investment’
So, when is a ‘Related Party Investment’ not an ‘In-House Asset’ and what are the exceptions to the ‘In-House Asset’ rules?
One of the most commonly utilised exceptions to the ‘in-house asset’ rules include 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.
Example – Investment strategies and ‘in-house asset’ restrictions
Mr and Mrs Brown have established an SMSF in which they are the members and trustees. The fund has $70,000 in cash, with which they as trustees would like to purchase a one third interest in a residential property in Byron Bay used for holiday letting.
Mr and Mrs Brown as individuals will own the other two third interest. They will borrow money to fund their purchase but their private residence will be used as security.
Mr and Mrs Brown intend to use the holiday property when it is not being rented. It will however 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 as trustees of the SMSF can invest as tenants in common in a residential property, as it falls within one of the exceptions of an ‘in-house asset’. The property would need to be bought from an unrelated party.
A member 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 trustee 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 trustee is in breach of the ‘in-house asset’ rules.
Not a situation any SMSF wants to find themselves in so be careful and if uncertain seek advice.
Important: 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. Consider the appropriateness of the information in regards to your circumstances.