Generally, an in-house asset is any of:
- a loan to, or an investment in, a related party of a super fund,
- an investment in a related trust of a fund, or
- an asset of a fund that is leased to a related party of the fund.
There are a number of exceptions, such as
- “business real property” that is leased by a fund to related party
- some investments in related non-geared trusts or companies, or
- assets specifically declared to be an exceptions.
The super law limits the size of in-house assets in a super fund to not more than 5% of the market value of the total assets. If at the end of a financial year the level of in-house assets exceeds this threshold, the fund must prepare a written plan to reduce the market value of in-house assets to 5% or less. The plan must be prepared before the end of the next financial year, and the steps in the plan must be carried out. Specifically, the law requires that the plan must set out steps to take in order to ensure that:
- one or more of the fund’s in-house assets held at the end of the financial year are disposed of during the next financial year, and
- the value of the assets so disposed of is equal to or greater than the excess in the value of in-house assets.
It is important to note that, although certain actions could reduce the level of in-house assets below the 5% limit, they might not satisfy the specific requirement to dispose of sufficient in-house assets. For example, a property owned by a super fund may be treated as an in-house asset because it has been leased to a related party. The fund might consider correcting the situation by simply terminating the lease. However, a view expressed by the ATO in July 2012 to the former NTLG Superannuation Technical Sub-group seems to require the disposal of the property:
As it is the residential property the subject of the lease to the related party of the fund, rather than that lease, that is an in-house asset, the ATO considers that the cessation of a lease of an asset to a related party of the fund does not result in the in-house asset (the residential property) being ‘disposed of’ for the purposes of section 82 of the SISA. The residential property remains an asset of the fund after the cessation of that lease.
Accordingly, cessation of the lease to the related party of the fund would not satisfy the requirements of section 82, notwithstanding that it might reduce the market value ratio of the fund’s in-house assets to below the 5% limit. As a consequence, the scenario raised in this question could also lead to a contravention of section 82 [the requirement to prepare a plan] and consequently another contravention of the civil penalty provision in section 84 of the SISA.
The law also seems to rule out restructuring arrangements outside the super fund to eliminate related parties as an acceptable plan, or situations where other assets of the fund are reliably expected to increase in value.
We recommend contacting your Nexia Edwards Marshall NT advisor if your fund is confronted with this problem, to ensure that any action taken is consistent with the requirements of the super law.