An SMSF’s in-house assets cannot exceed 5% of the fund’s total market value, tested both when an asset is acquired and again at 30 June each year. In-house assets are loans to related parties, investments in related parties, and fund assets leased to related parties. Breach the cap and you must dispose of the excess under a written plan; ignore the rules and each trustee can be fined nearly $20,000, or the fund can lose its complying status and have its assets taxed at 45%. The SMSF in-house asset rules sit in Part 8 of the Superannuation Industry (Supervision) Act 1993, and they apply regardless of whether the transaction was on commercial terms.
What Counts as an In-House Asset
Section 71(1) of the SIS Act defines an in-house asset as one of three things:
- A loan to a related party of the fund, such as lending fund money to a member’s family company.
- An investment in a related party, such as buying shares in a private company controlled by a member or their spouse.
- An asset of the fund leased to a related party, such as a fund-owned vehicle or piece of equipment used by a member’s business under lease.
Commercial terms and market-rate pricing do not take an arrangement out of the definition. The classification turns on the relationship, not the fairness of the deal.
Who Is a Related Party
The related-party net is wide. It covers fund members, their relatives, and any company, trust, or partnership those people control. Control generally means more than 50% of the voting power or value, or significant influence over the entity’s operations.
“Relative” under Section 17A of the SIS Act reaches well past the immediate household. It includes parents, children, grandparents, grandchildren, siblings, aunts, uncles, nieces, nephews, and first and second cousins of the member or of the member’s spouse or former spouse. It also picks up the spouses and former spouses of any of those people. Adopted and step-children count the same as biological children.1AustLII. Superannuation Industry (Supervision) Act 1993 – Sect 17A
A second cousin’s company or a former spouse’s family trust can pull an investment inside the rules without the trustee realising. Mapping the ownership of any target investment against a current register of related parties is the practical way to avoid an accidental breach.
The 5% Limit and When It Is Tested
The combined market value of all in-house assets must not exceed 5% of the fund’s total assets. This is an aggregate cap across every in-house asset the fund holds, not a per-asset limit. A fund with $1 million in total assets can hold no more than $50,000 of in-house assets in total.
The test applies at two points:
- At acquisition. Section 83 prohibits acquiring an in-house asset if the acquisition would push the ratio above 5%. Buying in over the cap is an immediate contravention, and the excess must be disposed of.
- At 30 June. Trustees must recalculate the ratio at the end of each financial year. A fund that was compliant on the acquisition date can still breach if market values shift.
Passive breaches happen at that second test. If the other assets fall in value, or the in-house asset appreciates, the fund can cross the line without the trustee doing anything. The law does not excuse the breach because the cause was market movement, but Section 82 gives trustees a defined window to fix it.
How to Calculate the Ratio
Divide the total market value of all in-house assets by the total market value of all fund assets, then multiply by 100. The calculation uses gross asset value, not net of liabilities.
Every asset must be valued at market value, meaning the price a willing buyer and willing seller would agree on in an arm’s length transaction. Historical cost and book value are not acceptable.2Australian Taxation Office. Guide to Valuing SMSF Assets For assets that are not publicly traded, independent appraisals or arm’s length comparable data are typically needed to support the figure. The valuation is done as at 30 June, and the ratio has to be recalculated each year even if no new investments were made.
Common Exemptions
Several categories of asset escape the in-house asset label even where a related party is involved. These exist to let business owners integrate their commercial operations with their SMSF in practical ways.
Business Real Property
An SMSF can own commercial premises and lease them to a member’s business without the property counting as an in-house asset, provided the property is used wholly and exclusively in one or more businesses. The business does not need to be the member’s; what matters is the property’s actual use.3Australian Taxation Office. SMSFR 2009/1 – Self Managed Superannuation Funds Ruling on Business Real Property
Any residential use generally fails the test. Two narrow exceptions apply for primary production land: the residential area must not exceed 2 hectares, and domestic use cannot be the predominant use of the overall property.4Australian Taxation Office. What Are the SMSF Investment Restrictions A flat above a shop typically fails unless the residential component is integral to the business, such as on-site caretaker accommodation.
Regulation 13.22C Related Trusts and Companies
SIS Regulation 13.22C exempts investments in a related trust or company that meets strict conditions. The entity must have no borrowings and no charge over its assets, must not hold interests in other entities (other than property and cash at bank), must not operate a business, and all its dealings must be at arm’s length. Any breach of these conditions permanently revokes the exemption, and the entire investment is reclassified as an in-house asset from that point.
Other Exemptions
Widely held unit trusts sit outside the definition because no small group of related parties controls them. Listed securities acquired at market value from a related party are also permitted under Section 66.
What Happens If You Exceed the Limit at 30 June
Section 82 sets out a mandatory rectification process. If the in-house asset ratio is over 5% at the end of a financial year (Year 1), the trustee must prepare a written plan that:
- Specifies the excess, calculated as the difference between the actual ratio and 5%.
- Identifies the specific in-house assets to be disposed of.
- Sets out the steps the trustee will take to sell enough of those assets to bring the ratio back to 5% or below.
The plan must be prepared and fully carried out before the end of the following financial year (Year 2).5AustLII. Superannuation Industry (Supervision) Act 1993 – Sect 82 A breach caused purely by market movements is not itself reportable, provided the trustee prepares the plan and follows it. It becomes reportable in the fund’s annual return only if the plan was not prepared or not carried out in time.
The asset itself has to go, not just the feature that made it in-house. If the in-house asset is a property leased to a related party, the fund must sell the property. Ending the lease is not enough.
Indirect Arrangements and Anti-Avoidance
You cannot sidestep the rules by routing money through an intermediary. Section 71(2) treats an investment in or loan to an unrelated entity as an in-house asset where the parties knew the funds would end up with a related party. Section 71(4) gives the Commissioner of Taxation a discretionary power to determine that an asset is an in-house asset even where it does not neatly fit the standard definition. Section 85 prohibits schemes designed to artificially reduce the apparent value of in-house assets below the 5% threshold. The ATO has issued specific taxpayer alerts warning that schemes to circumvent the in-house asset rules can result in the fund being made non-complying.
Lending to Members Is a Separate Prohibition
The in-house asset rules are sometimes confused with Section 65 of the SIS Act, which is a different and stricter regime. Section 65 flatly prohibits an SMSF from lending money to a member or a relative of a member, and from providing any other form of financial assistance using fund resources.6Australian Taxation Office. SMSFR 2008/1 – Self Managed Superannuation Funds Financial Assistance
“Financial assistance” is read broadly. The ATO treats it as including selling a fund asset below market value, buying an asset at an inflated price, forgiving a debt owed to the fund, guaranteeing a member’s personal obligations, or delaying recovery of a debt. Indirect assistance through another entity is also caught. There is no 5% tolerance here; any amount is a contravention.
A loan to a member is caught by both regimes at once: an in-house asset under Section 71 and a prohibited transaction under Section 65. Penalties apply under each.
Penalties and Enforcement
Administrative Penalties
The ATO imposes administrative penalties directly on individual trustees and directors of corporate trustees. Breaching the in-house asset rules under Section 84(1) attracts 60 penalty units per trustee, and breaching the Section 65 lending prohibition also carries 60 penalty units. As of November 2024, one Commonwealth penalty unit is $330, making the maximum administrative penalty $19,800 per trustee per contravention.7Australian Taxation Office. Our SMSF Non-Compliance Actions The unit amount is due to be indexed on 1 July 2026.8Australian Financial Security Authority. Penalty Units These penalties cannot be paid or reimbursed from fund assets; trustees pay personally.
Non-Complying Fund Status
In serious cases the ATO can issue a notice of non-compliance. The fund loses its concessional tax rate and its assessable income is taxed at 45%. On top of that, the fund must include in its assessable income an amount equal to the market value of its total assets, less any non-taxable contributions.7Australian Taxation Office. Our SMSF Non-Compliance Actions For a fund of any real size, this wipes out a large portion of the retirement savings in a single year.
Trustee Disqualification
The ATO can disqualify an individual from acting as an SMSF trustee. A disqualified person cannot be involved in managing any SMSF, which forces structural changes across every fund they act for.
Auditor Reporting
SMSF auditors are part of the enforcement chain. When an auditor identifies a contravention, they must notify the trustees in writing so the issue can be rectified before the audit is finalised. If it is not, the auditor must lodge a contravention report with the ATO within 28 days of completing the audit.9Australian Taxation Office. SMSF Auditor Reporting Requirements The reporting obligation is independent of the trustees, so a breach is not something an auditor can simply overlook.