This article deals with in-house assets and how they affect self-managed super funds (SMSFs).
In-house assets are investments, loans or leases to fund members and related parties. Related parties of a SMSF include a member’s relatives (e.g. parents, children, siblings, uncles and their spouses), business partners, companies under their control and standard employer-sponsors.
Your SMSF can’t invest in, or lend money to, or lease a fund asset to fund members and related parties unless the total value of the fund’s in-house assets is stless than 5% of funds total assets. At the end of each financial year you have to apply the ‘in-house asset rule’ using market values to make sure the level of in-house assets held is still less than 5%. If the market value of an in-house asset increases or the value of the fund’s assets fall you’ll need to dispose of some of the fund’s in-house assets to ensure the fund is not breaking any laws.
Case Study: James and Sarah
James and Sarah are members and trustees of their own SMSF – J & S Super Fund. The total market value of the fund’s assets is $300 000, which includes $100 000 in the fund’s bank account.
James and Sarah run their own printing business called – J & S Printing Pty Ltd. James and Sarah wish to buy shares in J & S Printing Pty Ltd using the cash held by the SMSF.
The shares in J & S Printing Pty Ltd are owned by James and Sarah (50% each). So J & S Printing Pty Ltd would be a related party of both members of the J & S Super Fund.
Therefore, an investment by J & S Super Fund in J & S Printing Pty Ltd would be an in-house asset. Assuming that the fund does not have any other in-house assets, the maximum amount that the J & S Super Fund can use to purchase shares in J & S Printing Pty Ltd is 5% of $300 000, i.e. $15 000.
Now let’s consider the practical application of this rule:
1. Can a SMSF loan money to a related party or business?
SMSFs can only loan money to related parties through a private company. It can’t provide a loan to individual members. These loans must be less than 5% of the total value of the SMSF.
2. Can a SMSF purchase or lease a car to a related party?
Your SMSF cannot buy you a car as a gift, but it can lease one to you provided the value of the car keeps the level of in-house assets to less than 5% of the total value of the fund. The car has to be leased to you at market value. For example, you can’t lease a $25 000 car at $1 per week as this does not reflect the market value of the car. So, if a vehicle lease company would rent the car for $200 a week, that is what you must pay your SMSF.
3. Can a SMSF purchase property and rent it to a member?
It’s possible for your fund to purchase a residential property and lease it to a member but it’s limited by the 5% rule. In practice, this is very difficult to achieve. For example, to purchase and lease a $400 000 hope, your SMSF would need more than $8 million.
An exception to the rule applies where the property is business related. A SMSF is able to own business real property and lease it to the business of a member or related party. The business property must be used wholly and exclusively for business purposes. In this case, the fund isn’t limited to the 5% rule. For example, your fund could purchase a warehouse and lend the space to a related party. The rent paid must reflect the market value.
4. Can the SMSF buy artwork, collectibles and other exotic assets?
Your SMSF can buy artworks and collectibles, but where are you keeping them? If the artwork and collectives (e.g. antique car or furniture) are purchased by the SMSF but kept in your home, then it must satisfy the 5% rule. You must lease the artworks and collectibles according to their market value. Paying less than the market value means you are getting the benefits of your super before you are entitled to it.
Is your SMSF breaking the law?
The total value of in-house assets owned by your SMSF must be less than 5% of the fund’s total assets. Every asset should comply with the sole-purpose test, that is, they have been purchased for the sole purpose of providing for you in retirement.
If you’re unsure about whether your SMSF complies with the in-house asset rule, get in touch with a financial advisor.
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