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In-house asset limits at risk of being breached

Scott Hay-Bartlem
By Adrian Flores
08 April 2020 — 1 minute read

The economic impact of COVID-19 has meant that some SMSFs could be in breach of the 5 per cent in-house asset limit when they were previously compliant, warns a law firm.

The ATO states that SMSFs are limited to the market value of in-house assets of being not more than 5 per cent of the market value of all the assets of the SMSF.

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But according to Cooper Grace Ward Lawyers partner Scott Hay-Bartlem, the market value of many common SMSF assets has plummeted in recent times, and this reduction in the market value of other assets can lead to SMSFs with in-house assets breaching the 5 per cent limit when previously they were compliant.


He said that, generally, if an SMSF breaches the 5 per cent in-house asset threshold at the end of a financial year, it must prepare a rectification plan to dispose of in-house assets so as to reduce the in-house asset level below 5 per cent by the end of the following financial year.

“If the trustee does not implement the rectification plan and reduce the in-house asset level below 5 per cent before the end of the following financial year, the SMSF has compliance issues,” Mr Hay-Bartlem said.

“In our experience, the ATO usually enforces these requirements quite strictly.”

Situations where the ATO won’t take action

Mr Hay-Bartlem said the ATO has responded to current market conditions and has announced it will not take compliance action against SMSFs where:

  • at 30 June 2020, the market value of an SMSF’s in-house assets is over 5 per cent because of the downturn in the sharemarket
  • the trustee of the SMSF prepares a rectification plan
  • by 30 June 2021, the rectification plan either:
    • cannot be effectively implemented because of market conditions
    • does not need to be implemented because the market recovers and the 5 per cent test is again satisfied at 30 June 2021

As a result, Mr Hay-Bartlem said SMSFs should always monitor their in-house asset percentage, particularly approaching 30 June 2020.

Further, he said that if the market value of the SMSF’s in-house assets exceeds 5 per cent of the market value of all the SMSF’s assets at 30 June 2020 because, for example, of the sharemarket downturn, the SMSF should:

  • prepare a rectification plan
  • monitor the situation throughout the 2021 financial year
  • attempt to implement the rectification plan
  • document the attempts and any inability to implement the rectification plan

However, Mr Hay-Bartlem said the ATO will not take any action if the rectification plan cannot practically be implemented due to market conditions or the sharemarket has recovered and it is unnecessary to implement.

But unless further guidance is released, he said auditors must still report the breach.

“It will not be enough to wait for 30 June 2021 and hope the market recovers so no action is necessary. SMSFs should be documenting what they do to try to implement their rectification plan,” Mr Hay-Bartlem said.

In-house asset limits at risk of being breached
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Adrian Flores

Adrian Flores

Adrian Flores is the deputy editor of SMSF Adviser. Before that, he was the features editor for ifa (Independent Financial Adviser), InvestorDaily, Risk Adviser, Fintech Business and Adviser Innovation.

You can email Adrian at [email protected].

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