Understanding In-House Assets under the Superannuation Industry (Supervision) Act 1993
When managing a Self-Managed Superannuation Fund (SMSF), it's essential to understand the concept of "in-house assets" as defined by the Superannuation Industry (Supervision) Act 1993 (SIS Act). Section 71 of the SIS Act outlines the regulatory framework for identifying and managing in-house assets, which are subject to strict controls designed to safeguard the integrity and financial stability of SMSFs.
Basic Definition of In-House Assets
Under Section 71(1) of the SIS Act, in-house assets of an SMSF include:
Loans to or investments in a related party of the SMSF.
Investments in a related trust of the SMSF.
Assets subject to a lease arrangement between the SMSF trustee and a related party.
However, several exclusions apply. The following are not considered in-house assets:
Business real property leased to a related party under specific conditions (for SMSFs with no more than six members).
Investments in widely held unit trusts.
Property owned jointly with a related party as tenants in common, unless subject to a lease arrangement.
Other asset classes specified in the regulations.
Widely Held Trusts
A trust qualifies as a widely held unit trust if it meets the following criteria under Section 71(1A):
Entities have fixed entitlements to all income and capital.
No fewer than 20 entities hold 75% or more of the income or capital.
13.22C Trusts
13.22C trusts are a specific type of trust that SMSFs can invest in without breaching the in-house asset rules, provided certain conditions are met. These trusts must:
Only hold real property.
Not borrow money (except under certain permitted exceptions).
Not have a charge over the property held by the trust.
Ensure that the SMSF trustee maintains strict control over the trust’s assets and operations.
Investments in 13.22C trusts are not considered in-house assets, making them a popular option for SMSFs looking to invest in property while remaining compliant with the SIS Act.
Part 8 Associates
Part 8 of the SIS Act defines “associates” of an entity broadly, which is key when assessing potential in-house assets. Associates include:
Relatives of the entity.
Business partners and their spouses.
Companies controlled by the entity or their associates.
Trusts where the entity or their associates have significant influence or control.
This broad definition ensures that any arrangement involving related parties is scrutinized to prevent conflicts of interest and protect the SMSF’s assets. Transactions with Part 8 associates must be carefully managed to avoid breaching the in-house asset rules, particularly since such relationships are integral to understanding when assets may be deemed in-house.
The 5% Rule
A key restriction for SMSFs concerning in-house assets is the 5% rule, outlined in Section 82 of the SIS Act. This rule stipulates that the total value of an SMSF’s in-house assets must not exceed 5% of the fund’s total assets. This limit is designed to minimize the fund’s exposure to related-party transactions and reduce potential risks.
If the value of in-house assets exceeds 5% at the end of a financial year, trustees must prepare a written plan to reduce the value below the 5% threshold by the end of the following financial year. Non-compliance with the 5% rule can result in penalties and regulatory action.
Conclusion
Understanding the rules around in-house assets is essential for SMSF trustees to ensure compliance with the SIS Act. Trustees must carefully assess their investments and arrangements with related parties, including those involving Part 8 associates, to avoid breaching regulatory limits on in-house assets. This safeguards the integrity of the fund and protects the members’ retirement savings.