In-house asset rule – but you can lend money to a cousin

Your Super Fund can’t lend money to a ‘related party’: Superannuation Industry Supervision Act 1993 (SIS Act). This is the in-house asset rule. The ATO does not want you or a ‘related party’ to gain a benefit from your SMSF. The wealth in your SMSF is for your retirement only.

But, who are the ‘related parties’? Who are your ‘relatives’? How can an inanimate object like your Self-Managed Super Fund even have relatives?

There is an exemption to the in-house asset rule. Your SMSF can lend money to a related party. However, the loan must be 5% or less than the total net value of your SMSF. This is a continuous test. It is not just when your SMSF lends you the money. It is all the time. If the assets in your SMSF  ever drop in value then the loan may be over 5% of the total value of the SMSF assets. You then breach of the in house asset rule.

Mickey and his cousin – in house asset rule

The in-house asset rule does not apply to cousins.

Mickey and his cousin are not ‘related’ according to the ATO. The in-house asset rule does not therefore apply.

Mickey’s cousin needs a $100k loan. Mickey is happy to lend his cousin the money from his SMSF. But Mickey only has $1m in his SMSF. Sadly, $100k is 10% of the total fund’s assets. Does it breach the 5% in-house asset test? Mickey’s accountant says it is not relevant. This is because a cousin is not a ‘related party’. It is not on the list:

parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the member or their spouse. Spouse of any above person.

Mickey’s accountant is correct.

However, before the loan is made do some housework:

1. if the SMSF does not specifically allow for such loans then amend your SMSF trust deed here  – update also satisfies SISR s13.3A, s65 & s109.

2. if your SMSF investment strategy does not allow for such a loan then update it here.

3. the loan agreement must be commercial. Build a Loan Agreement online here.

If you need a hand building the documents online just telephone us.

Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
Australia wide law firm
Mobile: 0477 796 959
National: 1800 141 612
Email: [email protected]

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