In-house asset rules a trap for SMSF advisors, trustees

The in-house asset rules pose one the biggest pitfalls for SMSF trustees and their professional advisors, says Graeme Colley, Director, Technical and Professional Standards, of the SMSF Professionals’ Association of Australia (SPAA). 

He says SPAA is concerned that these rules – one of the most complex set of investment rules in the SIS legislation – are the cause of a significant number of breaches of the legislation and, as a consequence, are exposing trustees to the dangers of  significant penalties, non-compliance of the fund or possible disqualification as a trustee.

An in-house asset is defined as a loan to or an investment in a related party of the fund, an investment in a related trust of the fund or a lease of a fund asset to a related party.

Colley says the introduction of education directions, rectification directions and administrative penalties from 1 July 2014 for SMSFs have meant a brush up of all provisions of the SIS Act and Regulations for trustees and professionals to ensure the fund meets the rules and penalties are avoided.

He says a key reason for revising the in-house asset rules has to do with the number of Auditor Contravention Notices received by the ATO.

“For the year ended 30 June 2013 the most reported breach by number were loan requirements at 21.3%, with breaches of the in-house asset rules coming a close second at 18.3%. However, by value, the in-house asset breaches accounted for 28.3% of all breaches.

“These percentages signal that many trustees and their advisors do not have an understanding of the in-house assets or the fund is not administered as required by the SIS legislation,” he says.

The in-house assets require a superannuation fund to manage the investments of the fund so that the market value of its in-house assets does not exceed 5% of the fund’s total assets at market value.

“The trustees of the superannuation fund must ensure they do not acquire, by purchase or transfer, an in-house asset unless the fund will continue to meet the 5% limit after the acquisition.

“At the end of a financial year the trustees are also required to measure the percentage of the fund’s in-house assets and if the 5% market value test has been exceeded at that time the trustees must put in place a plan by the end of the next financial year and dispose, by sale or transfer, of assets to ensure the fund corrects the position and the in-house asset percentage is no more than 5% of the fund’s assets by market value.”

Colley says there are a number of publications and rulings from the ATO to assist in understanding the operation of the in-house asset rules.

“These include superannuation and income tax rulings on borrowings, trust income, business property and the general meaning of ‘in-house’ asset.

“In the end learning about the in-house asset rules is obtained from practical experience and a comprehensive understanding of how the in-house rules work.  Any one advising in this area also needs to understand how the in-house asset rules interact with other operating standards of the SIS legislation so that they can be considered an expert in this tricky area. For trustees, it highlights the need to get specialist advice.”