David Busoli, principal and mentor for the SMSF Alliance, said many trustees are not aware that in-house asset value is calculated on the gross value of the fund, rather than just the value of fund, and fall foul of the ATO for being in breach.
“That five per cent is calculated on 30 June and if you are over five per cent you have to do something about it. But most people believe the five per cent is calculated on the value of the fund not the gross value of the fund.”
He said that means that a fund with a $500,000 balance generally has an in-house asset limit of $25,000 but, if it was comprised of a $1 million asset with a $500,000 loan against it, the in-house asset limit would be $50,000.
There are some exceptions, he said. 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 an asset (excluding business real property) of the fund that is leased to a related party.
“If the fund has breached the in-house asset limit as at 30 June the law requires the fund to divest itself of the asset that caused the breach,” he said.
“For a first offence, this is generally overlooked provided it is rectified before the end of the following financial year.”
He added that if the in-house asset limit was exceeded, for the first time, during the year, provided it was not due to the acquisition of an in-house asset, no breach will occur if it’s rectified by 30 June.
“Such a scenario might arise due to disparate changes in investment valuations but could also occur because an existing asset has changed status such as an existing residential property becomes leased to a related party by way of a new lease or a change in relationship status such as marriage – unlikely but not impossible – causing an arm’s length residential tenant to become a related party,” he said.
