The way SMSF auditors must report breaches of the 5 per cent in-house asset limit may differ between initial and subsequent investments, but it is a myth they will only be considered a compliance issue at the end of the financial year, an audit practitioner has stated.
Red Willow Super managing director Marjon Muizer said section 83 of the Superannuation Industry (Supervision) (SIS) Act prohibited the acquisition of an in-house asset if its market value exceeded 5 per cent of an SMSF’s total assets and also prohibited further acquisitions if a breach had already occurred.
Speaking at today’s SMSF Association Audit Day 2024, Muizer gave a scenario where a fund had made an investment of $100,000 in a related company, exceeding the 5 per cent limit, and then four months later made a further investment of $25,000.
“In this scenario, we’ve had an initial investment and then a subsequent one and if both of those exceeded the in-house asset limit, in terms of reporting the value of the first breach, the $100,000 is really $100,000 less 5 per cent of fund assets,” she explained.
“You would not use the full amount, whereas with the subsequent investment, because the fund has already breached the in-house asset limit, you would record the full value because they were not able to make that investment at all and the value of the breach is $25,000.
“If you have multiple investments, or perhaps investments being acquired in stages, it can get really messy with the reporting under the in-house asset rules.
“For the first one you would look at what the total fund value is at year end, then you look at the 5 per cent rule and report the excess, but for any subsequent investments you would use the full value.”
She noted some auditors still believe the time to record a breach of the in-house asset rules is 30 June, but pointed out the breach is measured when it occurs and can apply at any point in time.
“When I first heard about the in-house asset rules because people said in-house assets cannot exceed 5 per cent at the end of the year, I thought that means I could, with my SMSF, lend money to myself or a related entity and make sure it’s repaid at year end and then I don’t have a breach,” she revealed.
“Yet section 83 specifically says it applies at any point in time so it doesn’t matter if you acquired an in-house asset during the year that exceeds the 5 per cent and you get rid of it before the end of the year, you would still have a breach.
“Section 83 really looks at what you’re doing during the year as opposed to at the end of the year.”
