My client’s SMSF lent money to a related entity last October. The value of the loan was less than 5% of the fund’s assets at the time, but the value of the fund’s other assets has since fallen. Is there anything my client needs to do before 30 June?
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One of the many investment rules that SMSF trustees need to comply with is the in-house assets test. The in-house asset test essentially restricts SMSFs from holding no more than 5% of their assets in in-house assets.
What is an in-house asset?
In-house assets generally include:
- loans to related parties,
- investments in related parties, and
- assets leased to related parties.
There are various exceptions, but none are relevant in this case. Your client’s loan to a related entity will be an in-house asset of the SMSF.
When is the 5% limit relevant?
The 5% in-house asset limit is tested:
- firstly, when the in-house asset is “acquired” (ie when the loan was first made), and
- then, each following 30 June.
In your case, the fund’s original “acquisition” (ie the making of the loan) in October 2021 didn’t exceed 5% (assuming the fund had no other in-house assets). But due to changes in the fund’s asset values, benefit payments etc, the fund’s in-house asset ratio may exceed 5% at the end of the following financial year (ie 30 June 2022). This situation in itself won’t cause your client to breach the in-house asset rules provided:
- the fund prepares a written plan by the end of the following financial year (ie 30 June 2023), setting out the amount of the fund’s in-house assets in excess of 5% at 30 June 2022, and
- the plan sets out the steps the trustee proposes to take to dispose of one or more of the fund’s in-house assets at least equal to the excess, and
- the trustee carries out the plan (ie disposes of the necessary in-house asset amounts) by 30 June 2023.
In our view, even if a fund’s in-house asset level falls back below 5% due to say a recovery in markets after 30 June 2022, the trustee will still need to implement the written plan and dispose of the “excess” amount determined as at 30 June 2022.
If your fund’s in-house asset levels will be close to exceeding 5% at 30 June 2022, it may be appropriate to consider whether it is possible for members to bring forward any super contributions to increase total assets held by the fund at 30 June 2022 thus avoiding the need to enter into a written plan etc. Note, decreasing the value of any fund liabilities at 30 June 2022 will not impact the ratio of the fund’s in-house assets, as the relevant formula is based on the fund’s total gross assets, not the net assets.
And don’t forget - the in-house asset rules are not the only rules to be considered when lending money to a related entity. The trustee also needs to ensure:
- the sole purpose of the loan was to provide benefits to members on their retirement, and
- the loan is made and maintained on arm’s length terms and conditions.
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