In-house assets are capped at 5 percent, tested at 30 June. A fund can cross the line without buying anything

In-house asset breaches made up 15 percent of everything SMSF auditors reported to the ATO in 2023-24, the third-largest category behind loans to members and administrative errors. The rule that governs them is short: an SMSF may hold in-house assets up to 5 percent of the fund's total value, measured at market value at the end of each financial year. The part that catches funds is that the 5 percent can be crossed with no purchase, no loan, and no decision by the trustee at all.

What an in-house asset actually is

Section 71 of the SIS Act defines it as an asset of the fund that is a loan to, or an investment in, a related party of the fund, an investment in a related trust of the fund, or an asset of the fund subject to a lease or lease arrangement between a trustee of the fund and a related party. A related party covers members, their relatives, and entities they control.

So a fund that lends $30,000 to a company a member controls holds an in-house asset. So does a fund that owns units in a family trust, or leases a fund-owned asset to a member's business (business real property is a separate carve-out and is not caught). The ATO sets out how it reads the words loan, investment and lease in SMSFR 2009/4. The common thread is that value has moved between the fund and a party close to it, and the law wants that kept small.

Two separate 5 percent tests, and only one has a grace period

There are two tests, and funds tend to know the first and forget the second.

Section 83 is the acquisition test. A fund cannot acquire an in-house asset if the ratio already exceeds 5 percent, or if the acquisition itself would push it over. This one is a hard prohibition, tested the moment the fund makes the loan or investment. There is no cure built into it.

Section 82 is the year-end test. At the end of each year of income, the market value of the fund's in-house assets divided by the market value of all its assets must not exceed 5 percent. This is the test measured every 30 June, and it is the one that moves on its own.

Why compliant funds drift into breach

The year-end ratio has a numerator and a denominator, and both are market values struck at the same 30 June. A related-party loan or a parcel of related-trust units sits in the numerator. Everything the fund owns sits in the denominator.

Picture a $700,000 fund that lent $30,000 to a member's company. At the time, that loan was 4.3 percent, comfortably inside the limit. A year later the fund's listed holdings have fallen and its property is revalued lower, so total assets are now $560,000. The loan has not changed. It is now 5.4 percent of the fund, and the fund is in breach, having done nothing. The denominator shrank underneath it.

This is why the 30 June valuation exercise is not a formality. Every asset carried at a stale figure distorts the ratio in both directions, and a fund that revalues honestly can be the one that discovers the breach. We covered the valuation obligation on its own at smsfcore.com/blog/smsf-asset-market-value-30-june; the in-house ratio is one of the numbers that depends on getting it right.

The written plan most trustees never make

When the ratio exceeds 5 percent at year end, section 82 does not treat the fund as instantly non-complying. It requires the trustee to prepare a written plan, before the end of the next year of income, setting out how the fund will dispose of enough in-house assets during that next year to bring the value of what is disposed of up to at least the excess.

Two things about that plan are easy to miss. It has to be written, as a document an auditor can see, not an intention. And it has to be carried out: preparing a plan and then not acting on it is itself a contravention of section 82 by the end of the following year. The grace is real, but it is a grace to fix the problem, not to wait it out. A breach that arose from market movement is curable this way. A breach that arose from acquiring an in-house asset over the limit is a section 83 problem, and section 83 has no plan.

The exemption funds lean on, and where it fails

Many funds hold related-party property through a non-geared unit trust under regulation 13.22C, precisely so the units are excluded from the in-house asset rules. That exclusion is strict and it is conditional at all times, not just at set-up. The trust cannot borrow. It cannot lend to anyone, related or not. It cannot hold an interest in another entity, run a charge over its assets, or acquire an asset from a related party other than business real property.

Break one condition once and regulation 13.22D treats the trust as permanently tainted: the units become in-house assets and stay that way, even if the breach is later reversed. A single intercompany loan out of the trust, or a small overdraft, can convert a structure a fund built to sit outside the rules into 100 percent in-house exposure. Funds using 13.22C trusts carry a checklist obligation every year, not a one-time approval.

What we built for it

SMSF Core records each related-party dealing a fund holds, tags it as an in-house asset, and runs the ratio against the fund's 30 June market values so the 5 percent line is a number you can see through the year rather than a surprise at audit. Where a fund relies on a 13.22C trust, the record keeps the conditions visible so a tainting event is caught when it happens. Every figure cites the provision behind it, and nothing in the tool is an assessment of your fund.

Related-party dealings run deeper than this one ratio: the same boundary decides how the in-specie transfer rules work, which we set out at smsfcore.com/blog/smsf-in-specie-share-transfer-cgt. There is a sample fund at app.smsfcore.com/demo if you want to see the records with data already in them.

SMSF Core is an information tool, not a licensed financial service. Talk to a licensed adviser or your accountant before acting.