SMSFs are limited to the market value of in-house assets being not more than 5% of the market value of all the assets of the SMSF.
The market value of many common SMSF assets has plummeted in recent times, and this reduction in the market value of other assets can lead to SMSFs with in-house assets breaching the 5% limit when previously they were compliant.
What an SMSF must do if it breaches the 5% in-house asset limit
Generally, if an SMSF breaches the 5% in-house asset threshold at the end of a financial year, it must prepare a rectification plan to dispose of in-house assets so as to reduce the in-house asset level below 5% by the end of the following financial year. If the trustee does not implement the rectification plan and reduce the in-house asset level below 5% before the end of the following financial year, the SMSF has compliance issues.
In our experience, the ATO usually enforces these requirements quite strictly.
ATO 'no action' position
The ATO has responded to current market conditions, and has announced it will not take compliance action against SMSFs where:
- at 30 June 2020 the market value of an SMSF's in-house assets is over 5% because of the downturn in the share market
- the trustee of the SMSF prepares a rectification plan
- by 30 June 2021, the rectification plan either:
- cannot be effectively implemented because of market conditions
- does not need to be implemented because the market recovers and the 5% test is again satisfied at 30 June 2021.
What should SMSFs do?
SMSFs should always monitor their in-house asset percentage, particularly approaching 30 June 2020.
If the market value of the SMSF's in-house assets exceeds 5% of the market value of all the SMSF's assets at 30 June 2020 because, for example, of the share market downturn, the SMSF should:
- prepare a rectification plan
- monitor the situation throughout the 2021 financial year
- attempt to implement the rectification plan
- document the attempts and any inability to implement the rectification plan.
The ATO will not, however, take any action if the rectification plan cannot practically be implemented due to market conditions or the share market has recovered and it is unnecessary to implement.
Unless further guidance is released, auditors must still report the breach.
It will not be enough to wait for 30 June 2021 and hope the market recovers so no action is necessary. SMSFs should be documenting what they do to try to implement their rectification plan.
Cooper Grace Ward is a leading Australian law firm based in Brisbane.
This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please contact Cooper Grace Ward Lawyers.