Regulations exist to prevent the use of an SMSF to provide benefits to a member or related parties. Without these rules trustees may choose to use their superannuation entitlement to support their business, personal investments and their immediate wellbeing. Whether it is considered a prudent investment decision for the fund makes no difference. This concept is caught by the ‘In-house asset’ rules.
An in-house asset in simple terms is a loan to or an investment in a related party of the super fund. The definition also includes any asset which is subject to a lease between the trustee and a related party of the fund. In other words you cannot purchase a residential property or holiday home and then rent it to yourself or a relative even if commercial rent is being paid.
The term ‘related party’ is also very broad. It includes – relatives, business partners, companies controlled, and related unit trusts of the members and the standard employer sponsor, and any companies controlled by business partners or relatives of a member or the employer sponsor!
Like most legislation these definitions are subject to certain exclusions some of these include business real property (property that is being used as part of a business). In other words your SMSF can own the property you operate your business from providing it is leased at arms length and your business is paying the SMSF commercial rent.
Trustees should ensure that they are aware of these rules and if in any doubt seek advice before the transaction is entered into. Breaching the in-house asset rules can have serious consequences on the fund and can be very costly and difficult to unwind.