In this guide
In-house assets remain one of the most common contraventions reported to the Australian Taxation Office (ATO) via auditor contravention reports. In most financial years, it ranks as the second most reported contravention.
It’s always a good idea to brush up on your understanding of the essential in-house asset rule, particularly if your fund has a significant investment in a single asset.
Keep in mind that your SMSF can hold no more than 5% of its total assets as in-house assets.
What is an in-house asset?
The SIS Act defines an in-house asset as an asset of the fund that is:
- A loan to, or an investment in, a related party of the fund
- An investment in a related trust of the fund
- An asset of the fund subject to a lease or lease arrangement between a trustee of the fund and a related party of the fund.
‘Related party’ also has a very specific definition under SIS law and is any of the below:
- A member of the fund
- A standard employer-sponsor of the fund
- A Part 8 associate of one of the above.
Part 8 associates include relatives, the other members of the fund, the directors of the corporate trustee or all individual trustees (if the SMSF is a single-member fund).
If a member is in a partnership, then it also includes that partner (and their spouse or child) and the partnership itself. It also includes trusts, where the member and their Part 8 associates control the trust. The same applies to a company if a member and their Part 8 associates control the company.
Beware: The tax law definition of ‘partnership’ is used when referring to the in-house asset rules and it captures various arrangements that may exist, including where two or more parties receive income together.
The ATO defines a partnership as “an association of persons carrying on a business as a partner or receiving income jointly.”
For instance, if you have a joint bank account with another person, then you would receive interest income together. Hence you could get caught as Part 8 associates.
Relative, under the SIS Act, refers to an individual’s parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the individual or of his or her spouse; and the spouses of the individual and the individuals mentioned above.
Why is there a limit?
The purpose of the 5% limit is to manage the risks associated with holding in-house assets and portfolio concentration.
The main risk of having too large an allocation to an in-house asset is that the fund could be used for something other than providing retirement benefits to members or death benefits to the beneficiaries of members.
This would contravene the Superannuation Industry Supervision (SIS) Act and the sole purpose test.
There are serious penalties for breaching the in-house assets rules.
Read more about the sole purpose test.
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