Auditing, Compliance, Investments, Regulation, Superannuation

Many ways to fix in-house assets

SMSF In-house assets 5 per cent limit Rectify

Trustees do not need to obey the letter of the law when looking to rectify a breach of the in-house asset rules from a practical perspective.

The partner of a top-tier accounting firm has confirmed it is unnecessary for SMSF trustees to strictly obey the legislative provisions when looking to rectify an in-house asset breach of the fund as there are other more practical measures at their disposal to achieve the desired result.

“The legal requirement is that to rectify a breach of the 5 per cent limit on in-house assets is to divest of the asset. It says you need to sell one or more of the assets in the fund to get it under the 5 per cent limit,” Deloitte superannuation, SMSF and retirement savings partner Liz Westover said.

“Now in practice that’s not how it always actually happens. From a practical sense so long as [the in-house assets] are under 5 per cent [of the total assets of the fund] at the end of the year, our problem goes away.

“So there is a slight misalignment between what the law says we need to do to fix the 5 per cent breach and what actually happens.”

To this end, Westover pointed to several other courses of action, apart from selling the asset or assets in question, advisers can suggest their SMSF clients use to arrive at an appropriate outcome.

“[Other ways as to] how people might fix [the problem] is by making contributions to the fund or [revalue] other assets where their value goes up so the valuation of the in-house asset goes down as a percentage [of the SMSF’s total holdings],” she said.

“It could be the asset itself [no longer fits the definition of] an in-house asset [because] it takes on some other characteristic and in practical terms that’s often how we solve [this type of issue].”

According to Westover, before undertaking any course of action to rectify an in-house asset breach, advisers and trustees should consult with the SMSF auditor to confirm if the proposed plan complies with other legal and regulatory obligations.

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