SMSF Assets and Investments
Separation of Assets
It is the responsibility of a trustee to make sure that the SMSF assets are kept separate from personal assets. This is a requirement for super laws and it protects the asset of the fund from personal financial disputes. It also removes the risk that the assets will be used for personal use and help auditors identify the ownership of assets.
To separate fund and personal assets, it is a rule that the SMSF should have a separate bank account for its money. It must also be made clear that the fund is the owner of the assets and that the assets must be documented as held by the trustees on behalf of the SMSF. Assets of the fund cannot be held in the name of one trustee. SMSF assets are not for a trustee’s personal or business use, they are solely for retirement.
Loans And Early Access
The purpose of SMSF is to provide super payments for you in your retirement, which is why there are very strict rules on how and when you can access these benefits.
Providing financial assistance to a fund member or trustee or a relative is not allowed for SMSF. Lending money to a member or a relative is also not an option with SMSF even if they pay interest for the loan. Withdrawing money from the fund or early access is also not an option and is strictly prohibited.
The fund’s asset must be maintained solely to provide for retirement and these rules must be followed to continue receiving tax benefits for the SMSF. If an SMSF does not comply with these rules, it could lose almost half of its assets to tax and trustees can be disqualified from being trustees.
It is good to talk to an SMSF adviser if you want to find out more about SMSF loans and early access.
Related Third Party Transactions
Trustees, members, relatives and other related entities of the fund will not and cannot get any immediate or present-day benefits outside the sole purpose of providing super benefits for the members when they retire.
SMSF trustees or members are not allowed to loan or lend money or give financial assistance to members or their relatives. If a relative wants to buy a property from a trustee of an SMSF fund, the asset should be valued at market value. SMSF can only sell assets to a related party if the transaction is in commercial terms.
In-house SMSF assets are loans to, lease with, or investment in related parties. They cannot be more than 5 percent of the value of the fund’s total assets.
Generally, SMSFs are not allowed to acquire assets from related parties. Trustees are not allowed to buy the property from relatives. However, there are exceptions. These include business real property and listed securities. Rules apply to some collectible assets as well. SMSF assets like artwork can be kept in art storage facilities because related parties are not allowed to store or use SMSF collectible assets.
To prevent potential problems from taking place, trustees avoid related party transactions.
If you are still unsure of what is allowed and not when it comes to transactions, talk to us and an SMSF professional will help you out.
Arms Length
Transactions of SMSF should always be at arm’s length basis. This means that SMSF assets must be bought and sold at market value. The income from the assets should also show the true market value of the return.
Accepting less for the current market value of an SMSF asset is a breach of SMSF rules. Transactions should be at arm’s length at all times is needed to protect your retirement benefits. This is necessary because it will make sure that you get the proper returns on the investments of the fund. If your investments are not at arm’s length, the asset values of your SMSF will suffer and have serious consequences to your funds and to you.
In-house Assets
Choosing the right investments for you SMSF is tricky because there are several investment rules that you have to adhere to.
In-house asset rules that:
- An in-house asset is an investment in a related party of your fund. This includes members of the fund, trustees, their relatives, and related entities.
- Examples of in-house assets include a house owned by the fund which may be leased to a member’s son, an investment company controlled by a member, or a loan partnership where the partners are members.
- Business properties are not classified as in-house SMSF assets.
What is the in-house asset rule?
The SMSF can have in-house assets but these cannot be more than 5% of the total market value of the fund’s assets. Some events can even affect the percentage values of the in-house assets, which imply that you should be more careful. Violations may cause the SMSF trustees to be fined. Continuous monitoring of in-house assets is necessary so that you do not break the rules. Sometimes, SMSF trustees avoid in-house assets to not risk violating the rules that apply to SMSF.
Borrowing and Limited Recourse Borrowing Arrangements
SMSF, generally, are not allowed to borrow money. A limited recourse borrowing arrangement is an exception. Borrowing and Limited recourse are when an SMSF borrows money to buy an asset. Here, if the SMSF defaults on the loan, the right of the lender is limited to the recovery of the asset, keeping the other SMSF assets protected. A careless investment decisions might postpone a retirement.
Before buying properties, work with an advisor and the bank to meet strict rules required by limited recourse borrowing arrangements. Be sure that you understand the rules and talk to us to get some advice.
Business Real Property
There are restrictions when investing with related parties like members or their relatives. However, these restrictions do not apply to market value purchases of business real property.
What is Business Real Property?
Real business property is an interest in land or buildings used in one or more businesses. The interest may be a lease or the fund owns the property. It is usually used for business except for some minor non-business use like when its use is relevant for the business. The property can be leased to the user for these purposes.
How the property is used determines if it is actually a business real property or not.
It is best to have all your SMSF assets and transactions check out by an approved SMSF auditor on an annual basis to make sure that all your strategies and moves are within regulations. In addition, before purchasing a property from a related party, talk to an SMSF professional to help you out.
Kingston Knight Audit are the Auditor Melbourne experts to contact when dealing with your trust account audit, SMSF Audit, financial statement audit, and internal audit requirements. Contact us today, Kingston & Knight Audit offers a free telephone consultation to establish how we can best help you achieve the assurance and compliance you require.
Call our Melbourne team today on 03 9088 2242, or email us via audit@kingstonknightaudit.com.au.
