If an SMSF makes a loan to, an investment in or leases an asset to a related party this will be defined as an ‘in-house asset’.
Provided no other rules are breached these transactions are allowed, but the total value of all in-house assets cannot exceed 5% of the fund’s total market value.
Note: leases of business real property are permitted and excluded from this limit.
Anton has an SMSF with $1 million balance.
He makes a decision as trustee of the SMSF to buy an investment property for $300,000. It is rented for short-lease holiday rentals through a real estate agent.
Anton and his family want to rent the property personally for 2 weeks of the year at commercial rates of rent.
The rent/lease of this property will create an in-house asset and will breach SMSF rules. As the value of the property represents 30% of Anton’s SMSF (rather than the 5% in-house assets threshold allowed), renting the property will breach the in-house asset limit and penalties will apply, even though he only rents the property for a short timeframe. The provision of benefits to members of the SMSF arising from renting the property is also likely to breach the sol purpose test.