THE AUDITORS INSTITUTE | FORUM

Archived Forums

When you become a member of The Auditors Institute, you immediately gain access to expertise, advocacy for your profession and peace of mind.

Ask a question in our members-only forum or use the search function to find prior technical discussions on your topic. You can expect a response within 24-48hrs.

Want to become a Member?

Join Now

Already a Member?

Disclaimer

The forum is made available by The Auditors Institute Ltd for the benefit of it’s members only, and its primary purpose is to facilitate education, training, and discussion between members. The information and answers provided within the forum are of a general nature and do not consider any specific circumstances, objectives, financial situation or needs related to the matter/s raised. The responses should not be construed as financial advice, and each Member should seek their own professional advice before making any decisions. The Auditors Institute Ltd and its representatives are not responsible for any actions taken based on the information provided in the forum.

To test this feature, visit your live site.

Terese Gerges

Jul 01, 2022

In-house Asset

in SMSF Technical Forum

I am currently auditing a SMSF which has invested $500,000 into a unit trust. After obtaining an ASIC search for the trustee company of the unit trust it was determined: 1. There were two directors, 1 being the member of the SMSF and the other director being a friend. 2. The member's associated companies owns 4 of the 8 shares, the reaming 4 shares are owned by the friend's associated company. Based on this information, is this loan considered an in-house asset?

I have not yet determined if the member of the SMSF is the appointer of the unit trust who has borrowed the $500,000 from the SMSF, or whether the friend and the member are business partners. If the friend and member of the Fund have invested money to build apartments, would they be considered Business Partners under Part 8? I understand, that is the member is the Appointer of the unit trust, then it will be considered an in-house asset.

3 answers0 replies

Comments (3)

Stephen Chiang

Jul 20, 2022

Hi Just want to clarify your response to the issue of "control". Are you saying that the control test extends further than the % ownership of the issued units held in the trust. It could equally apply to the shareholding and directorship of the trustee company of the unit trust?

THE AUDITORS INSTITUTE

Jul 21, 2022

Replying to

Hi Stephen

Yes "control" goes further than just the % of units owned in the trust.

The ATO ruling explains the "control" issue & I have copied the relevant paragraphs that explain it below.

Please let me know if this does not answer your query.

In my view the "in-house" asset rules are very complicated.

SMSF AAA is looking into having a webinar on this topic to assist auditors.

Thanks

SMSF AAA

Extract from SMSFR 2009/4:

"Definition of a 'related trust'

156. A 'related trust' is defined in subsection 10(1) as:

...a trust that a member or a standard employer-sponsor of the fund controls (within the meaning of section 70E), other than an excluded instalment trust.

157. Control of a trust is defined in subsection 70E(2). An entity is taken to control a trust if:

•a group in relation to the entity has a fixed entitlement to more than 50% of the capital or income of the trust; or

•the trustee of the trust, or a majority of the trustees of the trust, is accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of a group in relation to the entity (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts); or

•a group in relation to the entity is able to remove or appoint the trustee, or a majority of the trustees, of the trust.

158. A 'group' in relation to an entity is defined in subsection 70E(3) to mean the entity acting alone, a Part 8 associate of the entity acting alone, the entity and one or more of its Part 8 associates acting together, or 2 or more of the entity's Part 8 associates acting together.

Example 12 - Members and associates control a trust together

159. Tracey and Charlie are members of an SMSF. The SMSF holds 100% of the units in the unit trust. The unit trust has a corporate trustee. Tracey and Charlie are the shareholders and directors of the corporate trustee.

160. Tracey and Charlie are both Part 8 associates of each other and therefore can act together to form a group. This group forms 100% of the directors and shareholders of the corporate trustee which therefore might reasonably be expected to act in accordance with their directions. Consequently, the unit trust is controlled by both Tracey and Charlie and is a related trust of their SMSF.

Example 13 - Members and associates control a trust together

161. Susan is the member of a single member SMSF. The SMSF invests in 25% of the units in a unit trust. The other 75% of the units in the unit trust are held by a company of which Susan holds 100% of the shares. The company is a Part 8 associate of Susan due to her shareholding. The company acting alone holds a fixed entitlement to 75% of the capital and income of the unit trust. Therefore, the unit trust is controlled by Susan and consequently is a related party and a related trust of Susan."

THE AUDITORS INSTITUTE

Jul 18, 2022

Hi Terese

The investment of $500,000 into the Unit Trust by it self would not constitute an in-house asset if the member and his / her associates do not own more than 50% of the units (we assume this is what you mean by shares) in the Trust. I also assume that she / he does not have a controlling interest in the Trust and that they are unlikely to influence the friend’s voting and decision making over the Trust.

You mention investment in the Trust and then also a loan to the Trust – either way this should not make a difference to the outcome. However, if the shareholding in the trustee company and / or the member’s (including associated entities) holdings in the trust are greater than 50% then this would mean that the entity is a related party and would be treated as an "in-house" asset.

Unit Trusts do not normally have an appointor – this is usually a role preserved for discretionary trusts – so you should confirm the full nature of the trust structure in question. A Unit Trust normally has the unit holders having a fixed share of the income and capital of the Trust.

If the member and friend have invested money to build apartments this does automatically mean that they are in a partnership under Part 8. A partnership for Part 8 has the same meaning as that in the ITAA Act 1997. A partnership is per the ATO:

"A partnership is an association of persons carrying on a business as a partner or receiving income jointly."

There is a taxation ruling TR 94/8 "Income tax - whether business is carried on in partnership" that provides guidance as to what constitutes a partnership & the ATO advise:

"We look at the following factors in deciding whether persons are carrying on business as partners in a given year of income:

Intention

-the mutual assent and intention of the parties

Conduct

(a) joint ownership of business assets

(b) registration of business name

(d) extent to which parties are involved in the conduct of the business

(e) extent of capital contributions

(f) entitlements to a share of net profits

(g) business records

(h) trading in joint names and public recognition of the partnership."

You will need to review the structure that they have invested in to determine if they are in a partnership as per ITAA Act 1997.

If the member and her / his friend conduct business activities in partnership or own a rental property in their own names in partnership then they would be considered partners and Part 8 associates under SIS. The member’s investment in the unit trust would then fall under the in-house asset rules, and the SMSF would be subject to having no more than 5% of its assets invested in in-house assets (including the investment in the Unit Trust).

The ATO also has a ruling that explains the in-house asset rules in detail, refer:

SMSFR 2009/4 - "SMSF's: the meaning of asset, loan, investment in, lease and lease agreement in the definition of an "in-house" asset in SIS".

https://www.ato.gov.au/law/view/document?Docid=SFR/SMSFR20094/NAT/ATO/00001&PiT=99991231235958

Unfortunately the in-house asset rules of SIS are very complicated and you have to work through the exact relationships and legislation to determine if a loan / investment will be treated as an "in-house" asset.

If other members want to comment on how they determine if an asset would be treated as an "in-house" asset that would be appreciated.

Thanks

SMSF AAA