It stated in the SMSFR that under a breach of the in-house asset rules:

The asset can never be returned to its former excluded state, even if the trustee fixes the issue that caused the asset to cease meeting the relevant conditions. The fund will be required to dispose of the shares or units it holds in excess of the 5 per cent limit within 12 months. In many cases, this requires the sale of underlying property or a significant restructure that could be costly to both the development and the SMSF.

“Will this lead to funds intentionally becoming non-compliant because they know that the development can be finished within the 12-month period and then sold so no effective breach is recorded?” Ms Siu said.

“A breach of the in-house asset exception can never be fully rectified. The repercussions are severe.”

Ms Siu also noted the requirements for trustees in relation to SIS Regulations 13.22C and 13.22D.

The Reg. 13.22D additional conditions are:

• The trustee or company must not conduct a business.
• All transactions of the unit trust or company have to be conducted on an arm’s-length basis.

The basic Reg 13.22C requirements are recapped below. The unit trust or company must not:

• Hold an interest in another entity including units in another trust.
• Lease property to a related party of the fund or enter into a lease arrangement with a related party of the fund except for a legally binding lease over business real property (“BRP”).
• Make a loan to another entity.
• Borrow money or allow a charge over an asset of the entity.
• Acquire an asset from a related party of the fund or an asset that has been owned by a related party of the fund within the previous three years (unless the asset is BRP).

“The ATO reiterates it is critical that the unit trust or company complies with both the above regulations at the time the investment is acquired and at all times when the investment is held,” Ms Siu said.

“Failure to comply at any time is catastrophic because, if any of these conditions are not met, all investments held by the SMSF in that related company or trust including future investments in it will be in-house assets.”