Tax with Max: In-house asset rules

The 5% rule for in-house assets, purchasing family assets and maximising super contributions with franking credits.

Summary: Where a trustee acquires property or shares at market valuation, except for some specific restrictions, they are not caught by the in-house asset rules.  In-house assets include a loan to, or an investment in, a related party of the fund; an investment in a related trust of the fund; and an asset of the fund that is leased to a related party.

Key take-out: Where a super fund has in-house assets their value cannot exceed 5 per cent of the total value of the fund. As all investments in a super fund must be shown at market value in-house assets must also be shown at market value.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

The 5 per cent rule for in-house assets

Do any actions need to be taken in the event of a trustee acquiring assets such as property or shares at market valuation that exceed 5 per cent of the value of the total assets of the fund?

Answer: I think you are referring to the situation where an SMSF has in-house assets and the rules that relate to these investments. Where a trustee acquires property or shares at market valuation, except for some specific restrictions, they are not caught by the in-house asset rules.

The main exclusion placed on trustees with regard to investments is the ban on buying them from members and related parties. The exceptions to this rule are business real property and listed shares at market price. All other investments such as residential property cannot be purchased from members or related parties.

In-house assets include:

  • a loan to, or an investment in, a related party of the fund;
  • an investment in a related trust of the fund;
  • an asset of the fund that is leased to a related party.

Where a super fund has in-house assets their value cannot exceed 5 per cent of the total value of the fund. As all investments in a super fund must be shown at market value in-house assets must also be shown at market value.

As long as your SMSF does not have any of the in-house assets shown above you will not have to worry about the 5 per cent rule.

Purchasing family assets

Can a SMSF trustee purchase a property from their son-in-law's parent?

Answer: Under the investment rules applied to SMSFs, assets cannot be purchased from related parties with a few minor exceptions. Related parties are defined by the ATO as including:

  • members of the fund;
  • relatives of each member;
  • business partners of each member;
  • any spouse or child of those business partners, any company a member (or the members or their associates) controls or influences and any trust the member (or the members or their associates) controls;
  • standard employer–sponsors, which are employers who contribute to a super fund for the benefit of a member, under an arrangement between the employer and a trustee of the fund;
  • associates of standard employer–sponsors including business partners and companies or trusts the employer controls (either alone or with their other associates), and companies and trusts that control the employer.

The ATO defines relatives of a member as being:

  • a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the member or their spouse;
  • a spouse of any individual specified above.

As the definition of a related party does not include parents, grandparents or other direct lineal descendants of the spouse of the member’s child, there should be no restriction on a SMSF buying a property from a trustee’s son-in-law’s parents.

The trustee has to ensure, however, that they can show that the property was purchased at fair market value, and as a matter of prudence should check with the auditor of the fund before proceeding with the purchase.

Maximising super contributions with franking credits

My wife and I are 58 and 67. We are currently both drawing transition to retirement (TTR) pensions from our SMSF. In addition, as shareholders of a 'non super' investment company, we draw down fully franked dividends annually to maximise our SMSF contributions. It is expected to take five years to fully utilise the franking credits at which time our company will be wound up.  Do you expect any policy changes in the upcoming Federal Budget that could immediately impact our five-year plan?

Answer: I have not seen anything in the press from either side of politics about possible changes that would be made to the dividend imputation system as it currently applies in Australia. To the contrary, the news that the Abbott government will not drop the company tax rate means the imputation credit will stay as it is at 30 per cent. Your question does, however, prompt a few other concerns that you should be aware of.

Firstly, as you are 67 years of age you should not be on a TTR pension. A TTR pension is only suitable for someone who is under 65 years and has not met another condition of release with regard to accessing their superannuation. The main condition of release for superannuation is reaching the age of 65. As a result you should have been on an account based pension since you turned 65.

For you to continue maximising your superannuation contributions from the fully franked dividends you are receiving, and to maximise the contributions to your SMSF when the company is wound up, you will need to satisfy the work test. This will effectively mean that you must be working at least 40 hours in a 30 day period for each year until you are approximately 72.

The only possible change to superannuation that may cause you concern is the policy announced recently by the Labor party relating to taxing large superannuation accounts in pension phase. Under this policy the plan will be to tax earnings in a pension account at 15 per cent when the income exceeds $75,000 a year. If your pension account has large unrealised capital gains these could be at risk of being taxed if the investments were sold and the new policy became legislation.

Claiming tax deductions for property costs

Once capital depreciation of an investment property has begun, can the depreciation be stopped the tax deduction is no longer required? An example would be if a person has retired and their income has reduced to below the tax threshold.

Answer: Taxpayers are not forced to claim a tax deduction. The only time taxpayers are required to take a tax benefit is when they make a capital gain and they must take the 50 per cent general discount.

This means if you no longer need to claim a tax deduction for the write off of the construction cost of an investment property you can stop doing so. You will need to keep a track of amounts claimed in prior years, as the total of these deductions will reduce the original purchase price of the property and thus increase the capital gain made.

Salary sacrificing and Centrelink benefits

If I reduce my tax by salary sacrificing does it affect the Centrelink benefits my wife gets?

Answer: One of the common features between income tax benefits and Centrelink benefits is a common definition of income. In most cases a person’s income counted for benefits is their taxable income that is adjusted for:

  • reportable employer super contributions (salary sacrifice);
  • reportable fringe benefits, and;
  • negative gearing investment losses.

This means if you sacrifice employment income as extra super contributions this will be reported on your PAYG withholding annual summary. Amounts sacrificed as extra superannuation must be shown on an individual’s income tax return and thus will be counted as income with regard to your wife’s Centrelink benefits.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au