There are numerous investment restrictions placed on super fund trustees by SMSF rulings. These include very stringent restrictions on any investment that involves a fund member, a relative of a member or any related company or trust.
In House Asset SMSF
An in house asset is defined by ATO as a loan to or an investment in a related party. A related party covers the usual structures – partnerships, trusts and companies. The restriction in this area relates to investments in or loans to one of those structures, where the structure can be said to be controlled by a member, a relative of a member or a group of related persons. Loans to a member or relative are covered by other specific restrictions.
Control of a company usually relates to shareholdings and control of a unit trust usually relates to unit numbers. Whoever controls more than 50% of the shares in a company or more than 50% of the units in a unit trust, is said to control that company or trust.
Unlike loans to members or relatives, loans to, or investments in, related structures are not completely prohibited. They are restricted to less than 5% of fund assets. Any loan must be within that limit and the interest rate must be commercial. Any investment, such as shares in a company or units in a trust, must have a value of less than 5% of fund assets. With loans, for example, an unsecured loan of $10000 would normally attract an interest rate equivalent to a bank personal loan or a credit card advance.
Sections 82 and 83 of the Superannuation Industry (Supervision) Act are the applicable parts of the governing legislation.
If a fund does breach these provisions, the auditor will be required to qualify the audit report. In addition, the auditor may be required to advise the ATO in writing about the breach.
Provided the investment or loan is either fully repaid or at least reduced to below the 5% threshold by years end and a fully-commercial rate of interest is paid on any loan, the ATO is unlikely to take action against the trustees, provided the trustees have taken steps to ensure no similar breaches take place in future. Any repeat of this breach is likely to result in serious enforcement action, at potentially enormous cost to the trustees.
For more information contact our friendly team on 1300 736 453.
Disclaimer: This information should not be considered personal financial advice as it is intended to provide general advice only. This factsheet has been prepared by Superhelp Australia Pty Ltd without taking into account your personal objectives, financial situations or needs.
The information contained in the factsheet may not be appropriate to your individual needs therefore you should seek personal financial advice before making any financial or investment decisions.