By Millinda Cobban, Associate Director, SMSFcentral
Last reviewed 12 August 2026. Figures current for the 2026-27 financial year.
Most breaches of the SMSF in-house asset rules are not deliberate. They happen because a trustee never recognised that a particular arrangement fell inside the definition at all. An in-house asset is a loan to, an investment in, or a lease of a fund asset to a related party, and Part 8 of the Superannuation Industry (Supervision) Act 1993 caps them at 5% of the fund’s total assets at market value, measured at 30 June. The exemption that does most of the work is business real property leased to a related party on arm’s length terms, which sits outside the rules entirely.
What counts
Section 71 catches three things. A loan to a related party, whether that is a member, a relative of a member, a company a member controls or a trust a member controls. An investment in a related party, such as shares in a member’s company or units in a member’s trust. And a lease of a fund asset to a related party, where the leased asset itself becomes the in-house asset.
The Act defines “related party” generously. It takes in members and their relatives, meaning spouse, children, parents and siblings, along with entities members control and other funds and trusts connected to them. Part 8 and the definitions in s10 set out the full reach, and we cover the wider body of rules governing dealings with those people and entities in our guide to related party transactions in SMSFs. This article deals only with the 5% quantitative limit.
How the 5% limit works
At 30 June each year, the total market value of the fund’s in-house assets must not exceed 5% of the total market value of the fund. Market value, not cost, which means the calculation depends on having current valuations for both sides of the fraction, supported by evidence the auditor can actually test. A fund with $1,200,000 of assets can carry $60,000 of in-house assets. Lend $80,000 to a related company and the fund is over.
The 30 June test is not the only constraint, and this is where trustees most often get caught. Section 83 separately prohibits acquiring an in-house asset at any point during the year if in-house assets would exceed 5% immediately afterwards. Section 84 then obliges the trustee to take all reasonable steps to comply with both rules, and it is s84(1) that carries the administrative penalty. A trustee who stays under 5% on 30 June but bought over the line in February has still breached something.
Note too that the ratio moves without anyone doing anything. A fall in the value of the fund’s listed portfolio can push an unchanged related party loan through 5%, which is why the ratio deserves a look during the year rather than only at year end.
When the limit is breached
Section 82 requires the trustee to prepare a written plan setting out the excess amount and the steps to dispose of enough in-house assets to remove it. The plan has to exist before the end of the next financial year and the trustee has to carry it out during that year, which in practice allows 12 months from the 30 June measurement date. Note the word written. An intention to sort it out, however genuine, does not satisfy s82.
The auditor checks the in-house asset level as part of the annual audit and must report any breach to the ATO on an auditor contravention report. From there the ATO can issue an education direction, impose administrative penalties, or in serious cases make the fund non-complying.
What sits outside the rules
Business real property
The significant exemption is business real property leased to a related party. If the fund owns a factory, office, warehouse or shop and leases it to a business a member runs, the lease falls outside the in-house asset rules provided the terms are at arm’s length. This exemption is the reason a great many SMSFs hold commercial property.
The property has to meet the s66 definition of business real property, which requires use wholly and exclusively in one or more businesses. Residential property does not qualify, and it does not start qualifying because a related party runs a business from a room in it.
Related unit trusts and older holdings
An investment in a related trust escapes the in-house asset rules if the trust satisfies regulation 13.22C of the SIS Regulations. Broadly, the trust must not lend to or invest in a related party of the fund, and its assets must not include a lease to a related party. These conditions are strict, and losing them is permanent for that investment, so a 13.22C trust needs watching every year rather than once at the outset.
Some transitional relief also survives for in-house assets acquired before 11 August 1999, when the current rules took effect. It is rare now, but older funds that have held the same investment for decades occasionally still rely on it.
The arrangements that catch people
Lending to a member is the most common and the most serious. It is a prohibited loan under s65 and an in-house asset, so a single transaction breaches two rules. Informal arrangements count. A member who moves money out of the fund’s bank account fully intending to put it back has made a loan, and the intention to repay changes nothing about whether the loan should have happened.
Collectables are the next most common. Trustees cannot store artwork, jewellery, wine and similar assets in the private residence of any related party. Regulation 13.18AA, made under s62A, also requires the trustee to document the storage decision and insure the asset in the fund’s name within seven days of acquiring it. The ATO may treat a fund-owned painting hanging in a member’s living room as a lease of the asset to a related party, making it an in-house asset, and it breaches the collectables rules independently. The sole purpose test is usually not far behind.
A holiday property is the same problem with a bigger price tag. Any use by a member or relative creates a lease and therefore an in-house asset, and paying rent does not cure it. It is very likely to breach s62 as well.
Two quieter traps are worth knowing. If the fund holds units in a unit trust and that trust lends to a related party of the fund, the investment can lose its exemption and become an in-house asset, sometimes without the trustee knowing, because somebody else manages the trust. And where the fund is a beneficiary of a related trust with an unpaid present entitlement owing to it, the ATO may treat the unpaid amount as a loan from the fund to the trust, which is an in-house asset in its own right.
Keeping on top of it
The annual review is not complicated, and it is far cheaper than a rectification plan:
- List every fund asset involving a related party, whether loan, investment or lease
- Work out which of them qualify for an exemption
- Get current market valuations for the non-exempt in-house assets and for total fund assets
- Calculate the percentage
- If it exceeds 5%, prepare and document the written rectification plan
Our compliance and administration service includes in-house asset monitoring as a standard part of the annual review.
Common questions
Can my SMSF lend money to my company?
A loan to a company a member controls is an in-house asset and has to stay inside the 5% limit. A loan to the member personally, or to a relative, is a separate prohibition under s65 that applies whatever the percentage. Lending to your own company is possible within limits; lending to yourself is not.
Does the 5% limit apply to property leased to my business?
Not if it is business real property leased on arm’s length terms. That exemption is what makes the arrangement work, and arm’s length terms means a market rent actually paid, not a rent recorded and forgotten.
What if market movements pushed us over 5%?
The rules do not distinguish. Whether the in-house asset grew or the rest of the fund shrank, the trustee still needs a written plan to get back under 5% within 12 months.
What is the penalty?
Breaching the in-house asset rules is a 60 penalty unit contravention under s166, and with the penalty unit at $364 from 1 July 2026 that is $21,840. The ATO penalises each individual trustee separately, so a two-member fund with individual trustees faces $43,680 for the one breach, while the directors of a corporate trustee are jointly and severally liable for a single $21,840. Trustees pay personally and cannot reimburse themselves from the fund. The ATO can also issue an education direction and, in serious cases, disqualify trustees or make the fund non-complying.
Can the auditor let a small breach go?
No. Auditors report every in-house asset breach on an auditor contravention report regardless of size. There is no de minimis threshold.
If you are not sure where your fund sits
Related party arrangements are easier to fix early than to unwind after an audit. If you would like someone to look at your fund’s position before 30 June rather than after it, call 02 8412 0086 or email [email protected].
This is general information only, not personal financial advice. SMSFcentral does not hold an Australian Financial Services Licence.