What are in-house investment assets rules?

As a Trustee of a Self-managed Superannuation Fund (SMSF) you can invest in any asset, however there are certain restrictions imposed on investing in a business, loans, or assets connected to the trustee and members of the fund. These assets are called in-house assets of the fund.

The in-house asset rules are designed to make sure your super remains strictly for retirement purposes — not for helping members, relatives, or related entities.

Certain limited related-party investments are permitted as long as they are tightly controlled and within the limits mentioned in the legislation. In this newsletter, we’ll break down in brief, what is in and what is not in an in-house asset rules.

Understanding In- House Assets in an SMSF

An in-house asset of a superannuation fund broadly means:

An asset of the fund, that is:

  • A loan to a related party of the fund;
  • An investment in a related party of the fund;
  • An investment in a related trust of the fund; or
  • An asset of the fund that is subject to a lease or lease arrangement with a related party.

In simple terms, if your SMSF is “investing in or doing business” with someone closely connected to the members or the trustees of the fund, it is likely that the investment to be an in-house asset. And if funds breach the in-house asset rules then the fund’s auditor is obliged to report the breach to the regulator, namely ATO.

Assets that are NOT In–House Assets

Not every investment connected to a related party will be treated as an in-house asset. The superannuation law also provides specific exclusions — meaning certain assets are automatically not counted, such as investments in in-house asset which are less than 5% of the total market value of all assets of the fund.

There are also some other assets which are not included as an in-house asset, some interesting examples of these assets are:

1.Life Insurance Policies : A life insurance policy issued by a registered life insurance company.

2. Bank Deposits; Money held as a deposit with an ADI (Authorized Deposit-Taking Institution) for example, a bank term deposit.

3. Assets Specifically Approved by the Regulator: If the regulator (usually the ATO for SMSFs) issues:

  • A written notice, or
  • A legislative instrument stating that an asset is not an in-house asset;

4. Business Real Property (e.g. shop, office or factory etc.) Leased to a Related Party: A business real property, and leased to a related party on proper legal terms;

5. Investment in a Widely Held Unit Trust; A widely trust is a fixed unit trust with fixed entitlements to the income & capital of the trust.

Widely held means at least here there are more than 20 entities (Including SMSF) which together at least 75% of units. A special note here is that all related entities are counted only as a single entity.

6. Property Held as Tenants in Common: If a SMSF and a related party jointly own property (as tenants in common), and it is not leased to the related party, it is not an in-house asset (remember no borrowing).

7 . Investment in SISR 13.22C Trusts: There are some special type of trusts which do not borrow and hold assets and only a bank account.

8. Where SMSF invests in a Custodian Trust: These are some special trusts which are created as property custodians when the SMSF borrows aka Bare Trusts.

What is the 5% Rule?

5% exemption investment in in-house assets is sometimes referred to as “5% In-house Asset Rule”. This rule applies to every superannuation fund that is regulated under the law including SMSF’s.

How Often is 5% Rule measured?

All SMSF Auditors check the 5% limit of in-house assets at the end of each financial year.

The fund must calculate the market value ratio of its in-house assets (basically, the percentage of the fund’s assets that are loans, investments, or leases with related parties) divided by the market value of all assets of the fund.

If this ratio is more than 5%, then the fund is considered to breach the 5% rule. Then the Trustees must take some action to resolve or to fix this breach.

Action 1: The trustee of the fund must prepare a written plan; This plan must show steps how the trustees propose to reduce the excess amount (above 5% limit)

  • One or more of the funds -inhouse assets held at the of the year are disposed of during the next following year and
  • The value of the assets so disposed of is equal to or more than the excess amount

This plan should be prepared before the end of next year and each Trustee of the fund must ensure that the steps in the plan are carried out.

Certain New In-House Asset Investments Prohibited

This rule applies to SMSF: If in-house assets are already over the 5% limit

  • trustees must not acquire any new in-house assets.
  • In other words, once you’re over the limit, you’re not allowed to add more.

If under the 5% limit

  • If the fund’s in house assets are less than the % limit, trustees must not acquire a new in-house asset if doing so would push the fund over 5% limit.

Hence trustees can only acquire in-house assets if, after the acquisition, the ratio stays at or below 5% of the market value of the funds assets.

What counts as “acquiring”

    • Acquiring an in-house asset doesn’t just mean buying one.
    • It also includes:
      • Making an investment in a related party.
      • Giving a loan to a related party.
      • Entering into a lease or lease arrangement with a related party.

Is lending to a member the same as an in-house asset?

“NO” - A trustee of an SMSF must not lend money of the fund to a member of the fund or a relative of a member of the fund or any other financial assistance using the resources of the fund to a member of the fund or a relative of a member of the fund.

There is a distinction between an in -house asset of a SMSF which is 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 or an asset of the fund subject to a lease or a lease arrangement between trustee of the fund and a related party of the fund

Example

Loan to a Member

Scenario: An SMSF lends $40,000 to a member to help with their personal business. This is not an in-house asset of the fund – this is a direct breach irrespective of the amount lent. Even if $1 is lent to a member or a relative – the fund would breach superannuation law.

Investment in a Related Private Company

Scenario: A SMSF purchases Units in a trust which has borrowed. If the investment is more than 5% of the funds market value of assets, the fund will breach the 5% rule.

If the trust has no borrowing and is a 13.22C trust, then the SMSF can invest more than 5% - in fact it can even invest 100% of funds cash in this unit trust.

How can we help?

Confusing? Even well-intentioned trustees can unintentionally breach the 5% rule through loans, investments, or lease arrangements with related parties. The consequences can be serious, including rectification plans, auditor contravention reports, and ATO penalties and non-compliancy and the fund losing its concessional status.

Our team is fully committed to ensuring that fund does not breach any superannuation law. If you need help with any of the above, do not hesitate to contact our office.