Managing In House Assets & Lending to Part 8 Associates

Under the SIS Act there are strict rules regarding Trustees investing in inhouse assets and in particularly lending to related parties.

The SIS Act defines an inhouse asset to be any loan, investment, or lease to a related party. There are some exceptions including business real property and investing in non-geared unit trusts.

Where an SMSF invests in a related party, the amount cannot exceed 5% of the fund’s total assets. If at the end of the financial year the SMSF’s level of inhouse assets exceeds 5% of its total assets trustees must prepare a written plan to reduce the market ratio to 5% or below by 30 June the following year.

Generally, the most common related party investment for an SMSF, is where a fund lends money to a related party (often a company controlled by the Trustees). Whilst it is possible to lender money to a related party, the most common mistake Trustees make is that there isn’t a proper loan agreement in place between the fund and the related party and the terms are not commercial i.e. the interest rate and repayments terms are not on an arm’s length basis.

In addition, the loan amount must be accessed at 30 June each year to ensure that it is no more than 5% of the funds total assets. If the loan amount is greater than 5% then the Trustees must put in a plan to reduce the market ratio by 5% which generally means repaying part of the loan.

Note whilst a fund can lend money to a related party it cannot not lend money to members as this is considered financial assistance and is prohibited by the SIS Act.