Selecting investments for your SMSF can be tricky.
There are lots of investment rules you must follow.
Let’s have a look at the in-house asset rule.
An in-house asset is basically an investment in a related party of your fund, which includes fund members, trustees, their relatives and related entities.
Some examples of in-house assets include:
- A house owned by the fund which is leased to a member’s son.
- An investment in a company controlled by a member.
- A loan to a partnership where the members are the partners.
Some assets, such as business property are not classed as in-house assets.
What is the in-house asset rule?
A fund can have in-house assets but they can’t be more than 5% of the total market value of fund assets.
Certain events will affect the percentage of in-house assets held, so you need to be careful.
Example
Bob and Greg have an SMSF.
Their fund owns machinery which is leased to Greg’s business.
Because the business is a related party of the SMSF the machinery is an in-house asset.
The machinery started as 4% of total fund assets.
But then, Bob retired and took a lump sum payment.
Now the in-house asset is more than 5 per cent.
The auditor reports the contravention and tells Greg he needs a written plan to dispose of the in house asset.
Greg doesn’t bother because his business needs the machinery.
So the ATO directs Greg to dispose of the in-house asset – this means Greg has to scale down his business operations.
Bob and Greg as trustees are also fined thousands of dollars – which they have to pay out of their own pockets.
You need to continually monitor the value of in-house assets so you never break the rules.
Many trustees just prefer to avoid in-house assets altogether!
If you want your SMSF to invest with someone you know, talk to your SMSF Options adviser before making the investment.
For more SMSF information, take a look at our other videos – or contact us here