Expert SMSF insights

1 Sep, 2016

By David Busoli

There is a general prohibition on an SMSF acquiring assets from a related party. This does not apply to some of the asset types referred to as in-house assets. From 11 August 1999 an in-house asset is defined as “A loan to, or an investment in, a related party of the fund, an investment in a related trust of 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”.

Certain in-house assets are excluded from the prohibition if:

• the asset is acquired at market value; and
• the acquisition of the in-house asset does not cause the fund to breach the 5% in-house asset limit.

Assets which are not able to be acquired are those subject to a lease arrangement with a related party. This was announced in SMSFR 2010/1 and was the result of an early release scheme involving selling member assets to the fund which were immediately leased back by related parties on a very short term lease. As each lease expired, returning the fund’s in-house asset position to zero, another member asset was acquired.

In-house assets which can be acquired are:

• Private company shares of a related company
• Units in a related unit trust
• Loans to a related company or trust

For practical reasons loans are rarely acquired. When shares or units are acquired it is important to ensure that the relevant entity is related. Often an entity may seem to be related but is not. An example could be where there are two equal shareholder/directors in a company that are not otherwise related. It is quite probable that the company would be designated as unrelated thereby making the shares prohibited acquisitions for their individual SMSFs. Careful analysis of each scenario is required to avoid costly mistakes.