Please be aware of the following, so this doesn’t happen to you!
One of the most unforgiving superannuation regulations is the 5 per cent in-house asset limit. When an Self-Managed Super Fund (SMSF) exceeds the 5 per cent limit as at June 30 of any year, the trustees must prepare a written plan to dispose of one or more in-house assets to reduce the value back to no more than the 5 per cent limit.
In a particular client’s case the SMSF’s total assets had a market value of approximately $2 million, and the value of the property purchased was $400,000. When the clients were advised that they had breached the in-house asset test, by having 40 per cent of the fund invested in a property rented to a related party, they thought that they could fix the problem by having their daughter move out and renting to an unrelated tenant.
They then got the bad news that as they had breached the 5 per cent in-house asset rule they had only one option, and that was to sell the property. When advised that if the auditor discovered the breach, and we did not have a plan in place to sell the property, the breach would have to be reported to the ATO.
At risk of losing complying status
If they chose not to sell the property but find an unrelated tenant it was advised the fund could be classed as non-complying and lose 49 per cent of the value of its assets in tax penalties, and they personally could also face ATO penalties of up to $10,800 each.
Finally, recognising the full implications of breaching the in-house asset limit, the clients agreed to prepare a plan to sell the rental property. When the accounts were sent to the auditor the plan (to sell) was too, and documents included showing an agent had been appointed to handle the sale.
Although the clients with the super fund did not have any penalties imposed by the ATO, by having breached the in-house asset test, they made a loss on the sale of the property after taking into account the selling costs.