There are transitional rules that apply to certain assets owned before 11 August 1999.
It is important, if you were affected by the transitional rules, that you review your fund's investment structure to ensure it continues to comply with the in-house asset rules after 30 June 2009.
The 10-year transitional period ended on 30 June 2009. Ensure your fund complies with the current in-house asset rules.
These guidelines are intended for SMSFs only. If you are a trustee of another type of fund, you should seek advice from the Australian Prudential Regulation Authority (APRA).
See also:
- Sections 71A to 71F of the Superannuation Industry (Supervision) Act 1993 (SISA) for more information about in-house assets.
An asset is not an in-house asset when it is included in a class of assets specified in the regulations.
See also:
- SMSFD 2008/1 – Division 13.3A of the Superannuation Industry (Supervision) Regulations 1994 (SISR) and our determination.
What transitional provisions apply to in-house assets?
Before 11 August 1999, an in-house asset was defined as a loan to, or an investment in, either:
- a standard employer sponsor of the fund
- an associate of a standard employer sponsor of the fund.
These rules were revised and the definition of in-house assets was extended.
The changes also included transitional rules so some specific loans and investment arrangements you entered into before the end of 11 August 1999 would not be included as in-house assets.
The maximum level of in-house assets your SMSF can hold is 5% of the market value of your SMSF's total assets. However, assets that are covered by the transitional rules are not counted towards the cap.
Transitional rules apply to existing related party assets that you obtained on behalf of your SMSF by the end of 11 August 1999, but which were not in-house assets under the old rules. The transitional rules also allowed you to make certain additional investments after 11 August 1999 and by 30 June 2009.
What changed after 30 June 2009?
After 30 June 2009, if your SMSF had investments with related parties or related trusts that were made before 11 August 1999, your SMSF would no longer be able to:
- reinvest any earnings from those assets
- pay up any partly paid shares or units
- make any additional investments in relation to those assets.
If you continued to reinvest earnings or make additional investments or loans after 30 June 2009 on behalf of your SMSF, the additional investments or loans would be in-house assets that count towards the 5% limit.
If there is an outstanding debt, as covered in section 71E of the SIS Act, any investment in the unit trust or company made after 30 June 2009 would be an in-house asset.
If you paid up partly paid shares or units after 30 June 2009 on behalf of your SMSF, a proportion of those shares or units (equivalent to the proportion of the payments made after 30 June 2009) would be treated as in-house assets.
See also:
- For more information about trust distribution, see our determination SMSFD 2007/1.
What remained the same after 30 June 2009?
Assets won't be treated as in-house assets if they are:
- investments or loans you entered into on behalf of your SMSF before the end of 11 August 1999 and were not in-house assets under the old rules (exempted pre 11 August 1999 investments)
- additional investments or loans you made between 11 August 1999 and 30 June 2009 which are in line with the transitional provisions
- fund assets subject to a continuous lease or an uninterrupted series of leases between the SMSF and a related party commencing prior to 11 August 1999.
What are the transitional rules?
Between 11 August and 23 December 1999
The following arrangements entered into between the end of 11 August 1999 and 23 December 1999 were not counted as in-house assets until 1 July 2001:
- investments made with or loans made to related parties or related trusts
- leases and lease arrangements with a related party.
This is provided that such investments, loans or lease arrangements would not have been in-house assets of the fund had they been entered into by the end of 11 August 1999.
This should no longer apply to any SMSF as the exception expired on 1 July 2001.
Reinvesting earnings
If the earnings your SMSF received from an investment held in a related entity on or before 11 August 1999 (that was not an in-house asset under the old rules) are reinvested in that entity, the amount so reinvested is exempt from the in-house asset rules. The earnings from such reinvestments may also be reinvested in the related entity.
However, the total amount that can be reinvested cannot exceed the sum of:
- the total amount of all dividends or trust distributions derived from the original investment held in the related entity before the end of 11 August 1999 and received by the fund from 12 August 1999 to 30 June 2009
- the total amount of all dividends or trust distributions derived from reinvesting the total amount stated in the above paragraph and received by the fund from 12 August 1999 to 30 June 2009.
This exemption applied until 30 June 2009. Any reinvestment you make on behalf of your SMSF after 30 June 2009 will be considered an in-house asset.
See also:
- For more information about reinvesting earnings, see our determination SMSFD 2007/1.
Unpaid trust distributions
It is possible that an SMSF that held units in a related unit trust on or before 11 August 1999 may have accumulated unpaid trust distributions that have not yet been paid or reinvested back into the trust.
If an SMSF has accumulated unpaid trust distributions relating to multiple years, these distributions may currently be in-house assets. This is consistent with the ruling SMSFR 2009/3.
This ruling states that non-payment of trust distributions from a related trust may be seen as an arrangement for the provision of credit or financial accommodation, which satisfies the extended definition of a 'loan' in a related party (meeting the basic definition of an in-house asset).
However, an opportunity existed until the expiration of the transitional rules (on 30 June 2009) for the outstanding trust distributions to be reinvested in the unit trust. This should have been done by either:
- the issue of new units which may be exempted from the in-house assets test
- entering into a contractual agreement whereby the unpaid distributions are paid and lent back to the unit trust on arm's length terms (including interest).
If your fund took this course of action, we will consider that any previous contravention of the in-house asset rules caused by the accumulation of unpaid trust distributions has effectively been rectified and take no further action.
Where a contractual agreement was entered into, it should be evidenced by a written record that indicated the terms of the loan. This may include whether the loan was at call, the amount of the loan and the interest rate or other means of calculation of the interest.
This written record should have been prepared by 30 June 2009 but, in practice, where the loan funds were with the borrowing entity as at 30 June 2009 and the actions of the parties were consistent with the existence of the agreement, we would extend the period for the formalisation of the agreement up to the due date for lodgment of the 2009 annual return.
Geared investments
If your SMSF holds exempted pre 11 August 1999 investments in a unit trust or company which is a related party of your SMSF, any additional investments in, or loans to, that unit trust or company (you made on behalf of your SMSF after 11 August 1999) are likely to be counted as in-house assets.
However, such additional investments are not counted as an in-house asset if all the following apply:
- the unit trust or company was geared on or before 11 August 1999
- a loan was owed by the unit trust or company to any entity other than the fund
- the sum of such additional investments does not exceed the amount of the loan in the unit trust or company at 11 August 1999
- such additional investments were made no later than 30 June 2009
- the trustee made a written election by 23 December 2000 that section 71E (Exceptions - Certain geared investments) of the SIS Act is to apply to such additional investments.
The relevant amount of the debt is the amount of the principal outstanding at 11 August 1999. If the sum of the purchase price of additional investments or loans exceeds the amount of the debt at 11 August 1999, the formula found in subsection 71E(4) of the SIS Act applies to work out the value of the increment that will be treated as an in-house asset.
The options under sections 71D (for reinvesting) and 71A (for investments and loans under pre 12 August 1999 contracts or for payments on partly paid shares or units in a related trust) are not available if you have made a written election on behalf of your SMSF under section 71E in relation to additional investments made after 11 August 1999.
Pre 11 August 1999 investments and loans
Fund investments and loans
If your SMSF had investments in, or loans provided to related parties or related trusts of your fund after 11 August 1999, they are not considered in-house assets if:
- the investments or loans were made under a contract entered into by the end of 11 August 1999
- the investments or loans occurred after that date.
Shares in a private company or units in a related unit trust
Shares you held in a related private company or units you held in a related unit trust, on behalf of your SMSF, are not considered in-house assets if you acquired them before the end of 11 August 1999 or under a contract entered into before that date.
This exclusion also applies to payments made on partly-paid shares or units in a related trust purchased prior to 11 August 1999, provided you did not make a payment after 30 June 2009.
Payments made after 30 June 2009 on these shares or units would result in these shares or units becoming subject to the in-house assets rules. The formula found in subsection 71A(3) of the SIS Act applies to calculate a reduced value of the in-house asset in these circumstances.
Next step:
To obtain the formula to work out the reduced value of in-house assets for payments on partly paid shares or units made after 30 June 2009, refer to subsection 71A(3) of the SIS Act.
Pre 11 August 1999: leases and lease arrangements
An asset you hold on behalf of your SMSF that is subject to a lease or lease arrangement entered into between your SMSF and a related party by 11 August 1999 is not considered an in-house asset. However, the lease must be a continuous one or must be renewed with no gaps between periods of the leases.
The terms and conditions of a renewed lease don't need to be the same, but the lease must be for the same asset.
The exemption will apply if a legally enforceable lease or lease arrangement came into force after 11 August 1999, but the agreement was entered into on or before 11 August 1999.
If a renewed lease or lease arrangement is for a new asset, or there is a gap between lease renewals, the market value of the asset is counted as an in-house asset.
Explains what an in-house asset is, the transitional rules that apply to certain assets owned before 11 August 1999 and the changes that apply after 30 June 2009.