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The ins and outs of the in-house asset rules – an exercise in sorting out forests and trees


One way of maximising the overall tax advantages provided by superannuation concessions is to use the investment rules, particularly the in-house assets rule, in the Superannuation Industry (Supervision) Act (SIS Act) as effectively as possible.

In a nutshell

The in-house assets rule allows the fund to place a limited amount of its assets in investments, loans or leases with those ‘related’ with the superannuation fund. The overall benefit is that the fund can earn income from them at a reasonable rate, and may receive tax benefits for the rent, interest or other income paid to the super fund by the ‘related’ party.

The amount of a fund’s in-house assets must not exceed five per cent of the market value of its total assets. This may sound restrictive but there are many exceptions to these rules which allow investments technically treated as in-house assets to be made without the limits applying. Measurement of the fund’s in-house assets takes place each time an asset is acquired and at the end of each financial year.

At first blush, the legislation in Part 8 of the SIS Act and the mass of information written on in-house assets seem to be an exercise in working out the detail of the trees from the forest. The detail is more relevant to self-managed super funds (SMSFs) as a minor shift in value or change in ownership can bring an investment within the in-house rules in an instant. Sometimes rectification may be easy, other times much less so.

Is it an in-house asset - or not?

What constitutes an in-house asset is generally easy to understand. It is an investment, loan or lease made to individuals or other entities ‘related’ to the superannuation fund. Related entities include fund members and trustees as well as certain trusts or companies they control. While the definition of who is a related party may have some twists and turns, the wide range of exemptions are much more difficult to navigate. The exemptions, however, also provide the best advantages from a tax and retirement planning perspective.

The first group of exceptions are there for two purposes. The first is to avoid unintended consequences and the other relates to the policy behind the rules. From a common sense point of view, some of these exceptions allow superannuation funds of large organisations to make certain types of investments in, or loans to, that organisation without being treated as in-house assets. Examples include superannuation funds of insurance companies that are able to hold insurance policies in the company for fund members, and banks being able to maintain bank accounts of the bank’s superannuation fund.

The exceptions due to policy reasons provide advantages mainly to SMSFs. For example, an SMSF can lease business property it owns to a related party. This provides the fund with a level of certainty in relation to the possible income that is expected to be received. For the tenant, it also provides safety in that the landlord is known and may also be a fund member or trustee. However, any lease made must be on a commercial basis to ensure it’s compliant with ATO regulation.

Another exception is the fund investing in companies and unit trusts which are controlled by related parties. The value of most of these investments will be included in the fund’s in-house assets. However, if the company meets certain rules and is not geared they will be excluded from the limits. One of the benefits of the ungeared companies or trusts is that the fund is able to purchase units or shares in conjunction with others, including related parties. This provides a much more flexible investment compared to the fund owning the investment in its own name or jointly with others. The downside of these arrangements is that a breach of these very specific rules may result in the shares or units being included in the fund’s in-house assets. This could result in the fund exceeding the five per cent limit and the fund may be required to dispose of the shares or units.

The second level of exceptions is the transitional rules which still have their place despite the fact they ended in 2009. These exceptions related to funds with investments in companies and unit trusts in 1999 which were not in-house assets at the time. The funds were allowed to purchase additional shares in the company or units in the unit trust up to the level of any dividends or distributions made between 1999 and 2009. The additional shares or units purchased by the fund are not included in the fund’s in-house assets at any time. There was another rule which acted as an alternative to allow additional shares or units to be purchased if there was an outstanding mortgage in the underlying company or unit trust investment.

Yes it's an in-house asset, but...

Once an investment, loan or lease falls within the definition of an in-house asset, does this mean it will always be included as an in-house asset of the fund? It will depend on whether the person, unit trust or company falls within the meaning of related party. In some cases a company or unit trust may be controlled by related parties because they own more than 50 per cent of it or other rules relating to control are met. Where the ownership by related parties drops to 50 per cent or less then control may not exist. This will mean those shares or units held by the superannuation fund will not then be included in the fund’s in-house asset percentage.

Now that we have covered the main parts of the in-house asset rules you can appreciate trying to see the trees, vines and other greenery from the forest can be very difficult. However, for clients that have SMSFs and wish to maximise the overall tax advantages of super concessions, an understanding of the investment rules, particularly the in-house asset rules, can benefit the client’s business as well as their retirement planning.
About the author
Graeme Colley is the Executive Manager, SMSF technical and Private Wealth at SuperConcepts. Graeme is a well-known figure in the SMSF community with a long-standing reputation as an accomplished SMSF educator, technical expert and advocate for the sector. Most recently, Graeme was Director, Technical and Professional Standards at the SMSF Association.

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