The in-house assets rule prevents trustees from using their SMSF as a source of finance for themselves or their related parties. Under the rule, the total value of a fund’s in-house assets cannot exceed 5% of the fund’s total assets at any time.
Breaching this limit is one of the more serious SMSF compliance failures and requires trustee action to correct it.
What Is an In-House Asset?
An in-house asset is any of the following:
1. A loan to a related party Any loan made by the SMSF to a related party (trustee, member, or related entity) is an in-house asset. For example:
- The SMSF lends $50,000 to a trustee’s family trust
- The SMSF lends money to a company in which a trustee holds shares
2. An investment in a related party
- The SMSF buys shares in a private company that a trustee controls
- The SMSF acquires units in a unit trust that is related to a trustee (subject to specific rules — some related trusts are exempt)
3. An asset leased to a related party
- The SMSF owns a property and leases it to a related party (with important exceptions — business real property leased at market rent is exempt)
Who Is a “Related Party”?
Related parties of an SMSF include:
- All members of the fund and their associates
- Trustees (or directors of the corporate trustee)
- Relatives of members and trustees (parents, children, siblings, spouse)
- Business partners of any trustee or member
- Companies or trusts controlled by any of the above
The definition of related party is broad. A company where a trustee is a director and holds 50% of shares is a related party.
Exempt Assets — What Is NOT an In-House Asset
Importantly, some investments in related parties are specifically exempt from the in-house assets definition:
Business real property: The most important exemption. If the SMSF owns commercial property and leases it to a related party (e.g. a business owned by the trustees), this is not an in-house asset — provided:
- The property is used wholly and exclusively in carrying on a business (business real property definition)
- The lease is at market rent (arm’s length)
This allows business owners to own their business premises through their SMSF and pay rent to the fund — a well-established and commonly used strategy.
Listed shares and managed funds: Investments in listed (ASX) shares or widely-held managed funds are not in-house assets, even if a related party also holds the same shares.
Widely-held unit trusts: Investments in certain broadly-held unit trusts are exempt.
LRBAs: Assets held in a bare trust as part of a Limited Recourse Borrowing Arrangement are not counted as in-house assets (the bare trust is considered distinct from a related trust).
The 5% Limit — How It’s Measured
At any time (not just at 30 June), the market value of the fund’s in-house assets must not exceed 5% of the fund’s total assets at market value.
Example:
- Fund total assets: $800,000
- 5% limit: $40,000
- SMSF has a loan to a related trust: $35,000 — within the limit
- If the fund’s total assets fall to $600,000: the limit drops to $30,000, and the existing $35,000 loan is now a breach
This means a breach can occur without any new action by the trustees — simply because the fund’s total asset value has declined.
What Happens If You Breach the 5% Limit?
If the fund’s in-house assets exceed 5% at any time, the trustees must:
- Prepare a written plan to reduce the in-house assets to below 5% by 30 June of the following financial year
- Implement the plan — this may involve selling the in-house asset, having the loan repaid, or growing other fund assets
- Not make any further in-house asset investments while the breach exists
The auditor will identify a breach in the annual audit and is required to report it to the ATO. If trustees do not address the breach, further penalties can apply.
Common Trustee Mistakes
Lending to a related party’s entity: Trustees sometimes lend SMSF cash to a company or trust they control, believing this is permitted. It is an in-house asset (the loan) and counts toward the 5% limit.
Buying shares in a private family company: Purchasing shares in a company that a trustee or related party controls is an in-house asset.
Leasing personal use assets to a related party: A residential property owned by the SMSF that is rented to a family member — even at market rent — is an in-house asset AND a sole purpose test issue. Residential property cannot be rented to related parties.
Forgetting that market movements affect the ratio: A fall in non-in-house assets can push the in-house percentage over 5% without any new investment. Monitor the ratio, especially in market downturns.
Frequently Asked Questions
Our SMSF buys shares in an ASX-listed company where a trustee is an employee — does that count as an in-house asset? No. Investments in listed companies (ASX-listed) are generally not in-house assets, even if a trustee or related party works for or has a small shareholding in the company. The related-party ownership threshold for this to become an issue is high.
Can the SMSF lend money to a member who is in financial difficulty? No. A loan to a member is an in-house asset (and is capped at 5% of total assets). It is not a mechanism for providing financial assistance to members. Withdrawing super to help a member is only possible through legitimate conditions of release (see Severe Financial Hardship).
We’ve just realised our SMSF has had an in-house asset exceeding 5% for several years — what do we do? Voluntary disclosure to the ATO is generally the best approach when a past breach is discovered. The ATO has a disclosure process and typically takes a more lenient approach to trustees who come forward proactively than to those where the breach is discovered in an audit. Consult a registered SMSF professional before approaching the ATO.
See also: Self-Managed Super Funds. For further guidance, see the ATO’s in-house assets guidance. Consult a registered SMSF specialist or tax agent for advice on your specific situation.