Tim Miller, head of technical and education for Smarter SMSF, said on a recent webinar for SuperGuardian that understanding the concept of in-house assets will also allow trustees to determine when they can invest 100 per cent versus 5 per cent of the assets in a fund.
“When we look at the Tax Office statistics in regard to in-house assets, it’s still the second-biggest breach by number of breaches performed in the SMSFs space, behind member loans, and there is clearly a link between loans and in-house assets,” Miller said.
“If you follow a few simple rules, ultimately you’re going to find yourself in less trouble, but the main thing is that for a lot of people, where the in-house asset rules become a bit of an issue, is when they are trying to get their SMSF to invest in some form of related entity for varying ranges of purposes.
“And because the rules around that can become quite strict, people get in trouble either by not knowing who’s a related party or by not knowing the rules around those related-party investments to make sure they get things right.”
Miller continued that while it is important to understand what constitutes an in-house asset, it is equally important to know what is not considered to be an in-house asset.
“The definition itself is pretty straightforward, a loan to or an investment in a related party of the fund, an investment in a related trust or the fund, or an asset of the fund subject to a lease or lease arrangement between the trustee of the fund and a related party of the fund,” he said.
“That is a fairly simplistic definition of what an in-house asset is, and we then have to extrapolate from that to work out what certain terms within that definition mean.”
Miller said that by determining what is considered an in-house asset, you can then work through anything that may be excluded.
“There are a couple of things that are on the exclusion list, including deposits with banks, life policies and pooled super funds,” he said.
“And a lot of these issues are not necessarily significant from the broader in-house asset rule, but can be significant, particularly with things like life policies, when you’re looking at acquiring assets.”
Some examples that could be significant are widely held unit trusts and property owned as tenants in common with a related party.
“[What we’re saying] is a self-managed super fund is a related party can own property – it is an exception to the in-house asset rules, unless we then lease it to a related party,” he said.
“So, if we lease a property that it is owned by tenants in common to a related party, it’s going to be an in-house asset.
“So, if you have a residential property, it can’t be leased to a related party, or more to the point, if it is leased to a related party, it’s going to be an in-house asset, and it’s more than likely that means it will breach the 5 per cent investment restriction on in-house assets.”
