Asset devaluation & In-house Asset Rule

The in house asset rules require that in house assets must not be more than 5% of the value of all assets of the fund, and also that a fund cannot acquire an in house asset if, as a result of the acquisition, the value of in house assets would exceed 5%. 

These rules are known as the “holding” and “acquisition” rules.  Both rules are based on market values of assets.

One difference between the two rules is that the “acquisition” rule applies continuously throughout a financial year to each acquisition of the fund while the “holding” rule only applies at balance date.

Given the significant decline in asset values, funds may be confronted with the situation that at balance date their in house assets may exceed 5%.  This may occur if the value of in house assets have not declined as significantly as the value of other assets (or may occur because other assets have been liquidated for fund expenses and benefit payments).

If the fund’s in house asset ratio exceeds 5% at balance date, the trustee must devise and implement a plan to sell off sufficient in house assets over the next 12 months, to reduce the level of in house assets to 5% or less.

The particular section of the SIS Act which requires this sell off is s82. 

Should s82 apply to a fund, there may be unwanted forced sales of in house assets in 2009/10.

It should be noted that the section requires the excess amount of in house assets to be sold off.  Simply making sufficient contributions in the next 12 months to increase the value of other assets will not satisfy the requirements of the section.

Possibly this is another area where the Government may consider modifying in order to forestall funds from having to offload in house assets which, typically, do not have a deep secondary market.