SMSF In House Assets: What Are They? What Are the Rules Around Them?

The in-house asset rules of self-managed super funds (SMSFs) are designed to ensure that SMSF trustees do not use the fund’s assets to give themselves or members an unfair advantage. The rules are also intended to protect the interests of all SMSF members, by ensuring that the fund’s assets are used primarily for the purpose of providing retirement benefits. The in-house asset rules prohibit SMSF trustees from holding more than 5% of the fund’s total assets in this category.

What is an in-house asset of an SMSF?

If your SMSF has in-house assets, there are strict rules you must follow. These rules are designed to ensure that your SMSF does not give an unfair advantage to members or related parties. You must value your fund assets at market value at least once every financial year.

In-house assets held simply are any of the following unless exempt:

• loan money to, or investment in, a related party of your fund
• an investment in a related trust of your fund
• an asset of your fund that has a lease arrangement to a related party.

Your fund’s in-house assets must be included in the investment strategy that sets out how you will comply with the rules. Your investment strategy must be reviewed at least once a year. You must also keep records of all transactions involving in-house assets. These records must be kept for at least 10 years.

SMSF and Related parties

The definition of a related party is important for SMSFs as there are strict rules governing transactions between the SMSF and a related party. These rules are designed to prevent abuse of the SMSF system and ensure that SMSFs are operated for the sole purpose of providing retirement benefits for their members.

A related party of an SMSF is any individual or entity that is:

• A fund member
• A relative of a fund member
• A trustee or director of the SMSF
• An employer, or an associate of an employer, of a fund member
• A person who has control or influence over the SMSF.

If an SMSF breaches the rules around related party transactions, the consequences can be severe, including civil and criminal penalties.

What are the SMSF in-house asset rules?

The in-house asset rules are designed to ensure that self-managed superannuation fund (SMSF) trustees do not use their SMSF assets to give themselves an unfair advantage over other fund members. The in-house asset rules are designed to ensure that SMSF trustees comply with the sole purpose test and do not use their SMSF to gain a personal benefit.

Under the in-house asset rules, an SMSF is prohibited from holding more than 5% of its total assets in an in-house asset.

Under the rules, an SMSF trustee must not:

• Use the SMSF’s assets to provide financial assistance to a member or their relatives
• Borrow money from the SMSF or use the SMSF as security for a loan
• Acquire an asset from a related party of the SMSF at less than market value
• Allow a related party of the SMSF to occupy a property held by the SMSF other than on commercial terms.

If an SMSF trustee breaches any of these rules, they may be subject to a range of penalties, including fines and disqualification from acting as an SMSF trustee.

Related Party Exceptions

An SMSF is not allowed to enter into transactions with a related party, unless certain conditions are met. These conditions are known as the ‘related party rules’.

However, there are a number of exceptions to the related party rules. These exceptions allow SMSFs to engage in certain transactions with related parties without breaching the rules.

Exemptions to the in-house asset rules

There are a number of handy in-house asset exemptions that allow your SMSF to still invest in, or with related parties and they include:

• Business real property that is leased on an arm’s length basis to a related party of the fund
• A loan to or investment in a related company or unit trust made before the 11th of August 1999
• Assets with a lease arrangement to a related party that have been continuous since before the 11th of August 1999
• Investments made into a related unit trust (non-geared) or company
• Investment in a public unlisted property fund (e.g. a widely held unit trust).

Other related party transactions

Other common ways that related parties can deal with each other is when they will buy and sell assets between them.

The SIS Act (Section 66) outlines that your SMSF can acquire these types of assets from a related party:

• Listed assets from an approved stock exchange like the ASX
• Business real property (meaning land or buildings used exclusively in a business)
• Where the value of the in-house asset in conjunction with value of existing in-house assets owned by the SMSF does not exceed the 5% limit when acquired.

What are the consequences of breaching in-house asset rules?

The in-house asset rules are complex, and trustees should seek professional advice before making any investments that could potentially breach the rules. Penalties for breaching the in-house asset rules can be severe, including disqualification from acting as an SMSF trustee. If you are found to have breached the in-house asset rules, there are a number of consequences that may apply. These include:

• The Australian Taxation Office (ATO) may issue a direction to wind up the SMSF
• The ATO may impose a civil penalty on the trustees
• The trustees may be disqualified from acting as trustees of the SMSF
• The SMSF may be liable for tax on any assets that have been acquired in breach of the rules.

If you’re thinking about using your SMSF to invest in a business or property, make sure you understand the in-house asset rules first. Otherwise, you could end up putting your retirement at risk.

Why is there a limit?

There are a few reasons why the ATO imposes a 5% of the total fund assets limit in an SMSF. The ATO wants to ensure that SMSFs are diversified and not too heavily invested in a single asset. This diversification helps to minimise risk and maximise returns for the fund members.

Secondly, the ATO wants to make sure that SMSFs are not being used as a way to get around tax laws. If an SMSF was allowed to have a large percentage of its assets in a single property or share portfolio, for example, it could be used for tax avoidance purposes.

Lastly, the ATO believes that having a limit on in-house assets helps to protect members’ retirement savings. If an SMSF was to invest a large percentage of its assets in a single property or share portfolio, and that investment performed poorly, it could have a significant impact on the retirement savings of members.

Can you live in your SMSF property in retirement?

If you’re thinking of using your SMSF to purchase a property that you’ll live in one day, there are a few things you need to know. First and foremost, under current legislation, you can’t live in a property owned by your SMSF until you retire.

There are a number of reasons for this. The purpose of an SMSF is to provide for your retirement, not to subsidise your lifestyle while you’re still working. If you were to live in an SMSF-owned property while you were still working, it would be considered on an arm’s length basis and attract significant penalties.

So if you’re thinking of using your SMSF to purchase a property that you’ll one day retire to, you need to be aware of the restrictions and make sure you have a solid plan in place. Otherwise, you could find yourself in hot water with the tax office.

Business real property

Acquiring business real property can be a complex process, and there are a number of important considerations to take into account. One key issue is the in-house asset and related party acquisition rules, which can impact both the purchase price and the tax treatment of the transaction.

Under the new in-house assets and related party acquisition rules, business real property is an exception. This means that businesses can continue to acquire real property from related parties, provided that the real property is used for business purposes.

The definition is quite broad and includes any land or buildings that are used for business purposes. This includes office buildings, retail premises, factories and warehouses. It also includes any associated fixtures and fittings, such as air conditioning units and security systems.

When done correctly, acquiring it can be a great way to expand your company’s footprint or add valuable assets to your portfolio. But it’s important to understand the rules and regulations surrounding this process before moving forward, in order to avoid any costly mistakes so it would be best to seek personal financial advice on the topic.

The bottom line

This can be a difficult rule to comply with, especially if the SMSF has a small number of members. In such cases, it may be necessary to invest in other assets, such as listed shares or managed funds, to ensure that the 5% limit is not breached.

If you’re thinking about investing in an SMSF, it’s important to gain personal financial advice about the in-house asset rules. They will be able to help you understand the rules and ensure that your SMSF is compliant.

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