The law prohibits SMSF's from owning in-house assets — but the ATO has a discretion. This article reviews the ATO's position on when it will exercise that discretion to allow an SMSF to own an asset that it might otherwise be prohibited from owning.
Broadly, an in-house asset of a superannuation fund is an asset of the fund that is:
An asset is not an in-house asset of a superannuation fund in certain prescribed circumstances, including:
The value of in-house assets that a trustee of a superannuation fund may acquire and hold is limited to 5% of the market value of the fund's total assets (Excess Amount).
The Excess Amount is calculated using the following formula:
To the extent that this area of law relates to SMSFs, it is administered by the Commissioner.
As the regulator of SMSFs under the SISA, the Commissioner has the power to determine under paragraph 71(1)(e) that a particular asset of an SMSF is not, or will not be, an in-house asset of the fund.
The law does not provide any criteria limiting when the Commissioner may exercise the discretion. Rather, the Commissioner must exercise the discretion by reference to the legislative context in which the law appears.
Broadly, the Commissioner will exercise his discretion:
In deciding whether to exercise his discretion, the Commissioner will consider the following:
Example: After the introduction of a requirement for a registrable superannuation industry licence (in 2004), the trustees of some small superannuation funds (regulated by the Australian Prudential Regulation Fund (APRA)), wanted to transfer their funds to SMSFs because the trustees did not want to become licensed trustees. At the time, the issue was:
assets which were not in-house assets of the APRA fund due to the operation of the transitional provisions would continue to be excluded from the in-house assets of the SMSF if the APRA fund itself was to become an SMSF; but
if the APRA-regulated fund wished to divide assets between that fund and an SMSF, then assets transferred from the former APRA fund to the new SMSF would become in-house assets of the SMSF.
Accordingly, the in-house assets of the SMSF may have exceeded the Excess Amount. The ATO's view was that the introduction of a licensing regime was unusual or out of the ordinary — because it was outside the trustee's control. After all, when the APRA fund trustees acquired the assets which were not then in-house assets of the APRA fund, they were not in a position to foresee the introduction of the new licensing requirements under which the acquisition was made. Therefore the ATO exercised its discretion to allow the assets to be held by the fund.
Examples of when the Commissioner won't exercise the discretion under paragraph 71(1)(e) include:
Fluctuations in economic conditions. Large changes in the value of an investment due to fluctuations in economic conditions won't justify the discretion. It would be contrary to the object of the in-house asset rules for in-house assets with a value above the Excess Amount to be permitted merely because of a substantial increase in the value of the in-house asset, or a substantial decline in assets other than the in-house asset.
Example The Administrative Appeals Tribunal (AAT) has held that a trustee who relied on advice from its accountant in relation to loans of the SMSF was still responsible for informing itself of the true factual situation of the fund at the time it signed the fund's tax return. The AAT considered that relying on accountants (and presumably on any adviser), even if they have done all they could to inform the trustee of the situation, does not constitute a special circumstance.
A determination made by the Commissioner under paragraph 71(1)(e) is issued to a specific SMSF in relation to its particular assets. Accordingly, a determination made in respect of another SMSF cannot be relied on even if your, or your client's, situation is arguably the same as that other SMSF.
If you want clarity as to whether an asset of a particular SMSF is an in-house asset, then you should seek a determination by the Commissioner.
For more information, please contact Maddocks (03) 9288 0555 and ask for a member of the Cleardocs Help Desk. They will put you in contact with the relevant Tax & Revenue lawyer in Melbourne or Sydney.
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 As set out in section 71(1) of Part 8 of the Superannuation Industry (Supervision) Act 1993 (SISA).
 Superannuation Industry (Supervision) Regulations 1994, 13.22B(2) and 13.22C(2).
 Part 8 of the Superannuation Industry (Supervision) Act 1993 (SISA)
 SISA section 82(3).
 Paragraph 71(1)(e)
 AAT Case 9537 (1994) 28 ATR 1220.
Daniel is a lawyer in the Maddocks Tax & Revenue team.Daniel advises extensively in the following areas:
His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Daniel worked at a Big Four Chartered Accounting Firm focusing on tax consulting for mergers and acquisitions.
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