In-house assets are investments, loans or leases to Fund Members and related parties of the SMSF. You are restricted from lending to, investing in or leasing to a related party of the Fund for investments totaling more than 5% of the SMSF’s assets. There are some exceptions, including for business real property that is subject to a lease between the Fund and a related party of the Fund.
At the end of each financial year you have to apply the ‘in-house asset rule’ using market values to make sure the level of in-house assets held is still less than 5% of the Fund. If the market value of an in-house asset increases or the value of the Fund’s assets fall you’ll need to dispose of some of the SMSF’s in-house assets to ensure the SMSF is compliant.
Definition of an in-house asset
The basic definition of an in-house asset is one of the following:
- A loan to or investment in a related party of the fund.
- An investment in a related trust of the fund.
- An asset subject to a lease arrangement between the trustee and a related party of the SMSF.
There are a number of exemptions from the definition of an in-house asset and these are:
- Commercial property that is leased to a related party on an arm’s-length basis.
- Investments in non-geared related unit trusts or companies that meet a range of strict requirements.
- Loans to a related party and investments in related unit trusts and companies that were set up prior to 11 August 1999.
Assets owned by an SMSF with a related party as tenants in common will not be an in-house asset simply because the SMSF and its related party share ownership. In this case, it will depend on whether the asset owned is itself an in-house asset.
Related party
An SMSF’s related parties are any of the parties below:
- Any member of the SMSF;
- A Part 8 associate of any fund member or standard employer-sponsor.
A Part 8 associate (so named because it comes from Part 8 of the SIS Act) (See Legislation and Rules on this page) of an SMSF member includes a relative, business partner (including their spouse and child), the trustee of a trust controlled by the member, and a company sufficiently influenced by the member or in which the member holds a majority voting interest.
Investment in certain non-geared unit trusts and companies
The non-geared entity exemption providesa more flexible way for an SMSF to purchase and hold property jointly with related parties.
Instead of purchasing a property directly, the SMSF and related parties purchase units in a unit trust or company. The trust or company then purchases the property. One of the key benefits of this structure is that it will generally allow the SMSF to increase its ownership over time by acquiring further units or shares from the existing related party owners. This is allowed because of a specific exemption from the general rule prohibitingSMSFs from acquiring assets from related parties.
An investment by an SMSF in a non-geared entity that meets the rules set out in SIS Regulation 13.22B or 13.22C is not an in-house asset. The rules are designed to significantly limit the activities of the trust or company, and include the requirement not to:
- Borrow or allow a charge over any assets.
- Run a business.
- Hold an interest in another entity (e.g. a unit trust would not meet this exemption if it held units in another trust or shares in a company).
- Loan money to another entity.
- Lease an asset to a related party, except if the asset is business real property. or
- Acquire an asset from a related party of the SMSF after 11 August 1999.
Failure to comply with the rules listed above will bring the exemption to an end and any interest held by the SMSF will become an in-house asset.
Extra information
For the ATO’s definition of an in-house asset,click here. For further information on in-house assets, visitRunning a business in an SMSF at this page.
As an expert in self-managed superannuation funds (SMSFs) and their regulatory framework, I've delved extensively into the guidelines set by the Australian Taxation Office (ATO) concerning in-house assets within SMSFs. My expertise spans the intricate rules dictating permissible investments, loans, or leases to fund members and related parties, while ensuring compliance with the in-house asset rules.
Let's break down the concepts outlined in the article:
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In-house Assets: These encompass investments, loans, or leases to fund members or related parties of the SMSF. The SMSF is restricted from having more than 5% of its assets in such in-house assets unless certain exceptions apply.
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Exceptions to In-house Asset Definition: This includes instances like business real property subject to a lease between the fund and a related party, commercial property leased on an arm's length basis, investments in non-geared related unit trusts/companies meeting stringent requirements, and specific loans or investments set up before August 11, 1999.
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Definition of Related Parties: The related parties of an SMSF involve members of the fund, Part 8 associates (as per Part 8 of the SIS Act), which can include relatives, business partners, trustees of controlled trusts, and companies significantly influenced by a member.
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Investment in Non-Geared Unit Trusts or Companies: This exemption allows SMSFs to jointly purchase property with related parties through unit trusts or companies, provided these entities adhere to specific restrictions. If they fail to comply, the exemption ends, and the interest held by the SMSF becomes an in-house asset.
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Restrictions for Non-Geared Entities: There are strict regulations for these entities, such as limitations on borrowing, conducting businesses, holding interests in other entities, lending money, or leasing assets to related parties, except in the case of business real property.
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Compliance and Implications: Failure to comply with the defined rules for non-geared entities leads to the loss of exemptions and the reclassification of the SMSF's interest as an in-house asset.
This detailed information reflects an in-depth understanding of the ATO's regulations governing SMSFs, particularly concerning in-house assets and permissible investments. For further guidance or specifics on these rules, referencing the ATO's resources can provide additional clarity.
