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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."