Is a loan by a SMSF to a property trust an in-house asset? – ATO Ruling

The ATO has issued a ruling considering the in-house asset status of a loan to a property trust which the SMSF has invested in via a related unit trust. The ruling, ATO Interpretative Decision 2014/23, addresses the following scenario:

  • The SMSF has a holding in a unit trust, which is a related party of the SMSF
  • This unit trust holds less than 10% of the units in a Property Trust
  • The SMSF makes a loan to the Property Trust
  • This loan is subject to a “commercial loan agreement”

ATO ID 2014/23 SMSF loan to property trust with investment in unit trust

The question answered in the ATO ID is:

“Will a loan from a Self Managed Superannuation Fund (SMSF) to a Property Trust be treated as an in-house asset?”

In the ID the ATO finds that under such an arrangement the loan would not be an in-house asset of the super fund, provided the Property Trust is not a related party of the SMSF or a “a related trust (a trust controlled by a member or a standard employer sponsor of the SMSF)”.

The ATO sets out the following argument to arrive at this conclusion – a SMSF is prohibited by s65(1) of the SIS Act from lending money to a member or relative of a member. Relatives includes only ‘natural persons’, and so s65(1) cannot apply to the Property Trust. However, an in-house asset (under s71(1)) includes loans to related parties of the SMSF. So the question is: is the Property Trust is a standard employer sponsor or a Part 8 associate or the fund? The ATO confines the scenario to the Part 8 question – is the Property Trust itself, or other unit holders, Part 8 associates of the members of the SMSF? The ATO determines that the Property Trust is not a related party of the fund, as a group of Part 8 associates do not control the trust, because:

“the SMSF and its related parties hold less than 10% unit holdings in the Property Trust and have no other control over the Property Trust.”

Therefore the Property Trust is not a related party of the fund, and the loan is not an in-house asset.

However it should be noted that the discussion in the Interpretative Decision was confined to the in-house asset aspects and not other potential issues of the arrangement.The ATO does point out that the loan would need to be “in line with the investment strategy of the SMSF”. Also, the ATO says out that “the relationship between the parties involved requires analysis” – which is always the case when applying the Part 8 associate rules.

The full text of the ruling can be found on the ATO website. This ruling replaces ATO ID 2002/697.

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