In short

SMSF loans to, investments in, or leases with related parties, meaning members, their relatives, or entities they control, are capped as in-house assets at 5% of the fund's total assets under SIS Act s.83. Business real property leased to a related party's business at market rent is a key exception. A breach must be cured with a written disposal plan by the end of the following financial year.

Self-Managed Super Funds operate under a specific structural constraint when it comes to investments and loans involving members, members' relatives, or entities they control. Under Part 8 of the Superannuation Industry (Supervision) Act 1993, the proportion of an SMSF's total assets that can be in-house assets — broadly, loans to or investments in related parties, and leases to related parties — must not exceed 5% of the fund's total assets at any time, with the cap set out in section 83 (https://classic.austlii.edu.au/au/legis/cth/consol_act/sia1993473/s83.html, accessed 6 May 2026). The rule exists because the SIS framework requires the fund to operate solely for retirement benefit purposes (the sole purpose test), and unrestricted related-party financial dealings would convert the fund from a retirement vehicle into a vehicle for current family financial support. The 5% limit is a hard cap with limited exceptions, and a breach that isn't cured within the prescribed period exposes the fund to serious compliance consequences including potential loss of complying fund status (ATO — related party and in-house asset transactions, https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/in-detail/smsfs/smsf-investing/restrictions-on-investments/related-party-and-in-house-asset-transactions, accessed 6 May 2026). For trustees of family-business and family-trust-using SMSFs, the 5% rule is one of the most consequential compliance constraints in the entire SIS framework.

The definition of in-house asset under section 71 of the SIS Act (https://classic.austlii.edu.au/au/legis/cth/consol_act/sia1993473/s71.html, accessed 6 May 2026) captures three categories. Loans to related parties — any lending by the SMSF to a member, a member's relative, or an entity the member controls. Investments in related parties — shares, units, or beneficial interests in companies, trusts, or other entities controlled by related parties. Leases to related parties — leasing fund-owned assets to a member's business or family use, except for the specific Business Real Property exception (discussed below). Each category catches arrangements that look obvious in hindsight but can drift into the SMSF informally during family-business cycles.

The definition of related party is broader than many trustees expect. Under Part 8 of the SIS Act, a related party includes the members of the fund themselves, standard employer-sponsors of the fund, and Part 8 associates of those parties. Part 8 associates include relatives of the member — spouses, children, parents, siblings, grandparents, grandchildren, and the spouses of each — partners of the member, trusts the member controls, and companies the member controls. So a loan from an SMSF to the member's son's business is in-house; a loan to the member's parent is in-house; an investment in a company controlled by the member's daughter is in-house. The Part 8 net catches most family-financial dealings, and trustees who think of "related party" narrowly as "me and my spouse" tend to underestimate the scope.

The Business Real Property exception is the principal carve-out and the basis for many SMSF property strategies. Under the s.71(1)(g) exclusion in the in-house asset definition, commercial real property owned by the SMSF and leased to a related party (typically the member's business) is not treated as an in-house asset, provided the property is wholly and exclusively used in one or more businesses (other than residential rental). This is what allows a small business owner's SMSF to own the commercial premises from which the business operates, with the business paying market-rate rent to the SMSF. The exception applies only to property used wholly and exclusively in business — residential property leased to family members is not BRP and remains in-house. For retiree clients with family businesses, the BRP exception is often the structural feature that makes the SMSF property strategy work, and the documentation around the lease (market rent, written agreement, exclusive business use) is essential.

A second carve-out — the non-geared unit trust exception under SIS Regulation 13.22C (https://classic.austlii.edu.au/au/legis/cth/consol_reg/sir1994582/s13.22c.html, accessed 6 May 2026) — allows an SMSF to invest in a unit trust holding business real property without the investment being treated as in-house, provided the trust meets specific requirements: it holds business real property used wholly and exclusively in business, it has no borrowings and no charges over its assets, it has no related-party loans of its own, and it has prescribed governance arrangements. This is the structural basis for some sophisticated arrangements involving multiple family SMSFs jointly investing in a property holding trust. The compliance is technical and deeds and trust documentation must be drafted precisely; many "13.22C trusts" fail one or more requirements and are inadvertently in-house, with consequences flowing through to the SMSFs that invested.

The 5% calculation is straightforward in principle but requires annual measurement. The proportion equals the market value of in-house assets divided by the market value of total fund assets, both at the same point in time. The annual measurement is typically at 30 June, the SMSF's year-end. For SMSFs with in-house assets that are relatively fixed in dollar terms (a $100,000 loan to a member's company, a $50,000 unit holding in a related trust) and total fund assets that move with markets, the proportion can vary materially year-to-year even without any new related-party activity. A bear market that shrinks the rest of the fund pushes the in-house proportion up. This is why trustees with any in-house exposure should aim to stay well below the 5% cap — typically at 3% or less — to leave room for market-movement spikes.

When a breach occurs, the cure mechanism under SIS Act s.82 (https://classic.austlii.edu.au/au/legis/cth/consol_act/sia1993473/s82.html, accessed 6 May 2026) is the structural safety valve. Where the in-house asset proportion exceeds 5% at 30 June, the trustee must prepare a written plan before the end of the next financial year to dispose of the excess and bring the fund back below 5%. The plan identifies the excess amount, specifies the assets to be disposed of, and sets a timetable. The disposal can be by loan repayment (the related party repays the in-house loan), sale of the related-party investment, or — less commonly — increasing the fund's other assets through additional contributions to dilute the proportion. The plan must be in writing, executed during the cure year, and the SMSF auditor will check both the existence of the plan and its execution at the next audit.

The consequences of unresolved breach are serious. If the fund doesn't return to the 5% cap by the end of the cure year, the breach is continuing and the ATO's response can include making the fund non-complying (with significant tax consequences — the fund's assessable income for the year, including the value of fund assets, is taxed at the highest marginal rate) and administrative penalties on trustees under SIS Act Part 20. For most SMSFs, the cure mechanism is the practical pathway: identify the breach, prepare the written plan, execute the cure, return to compliance. Persistent or wilful non-compliance is where the serious consequences arise.

A specific bear market spike scenario illustrates how breaches happen even without new related-party activity. SMSF has $1.5 million total assets including a $70,000 loan to a member's company (4.7% of $1.5m). A market downturn drops the fund's listed share holdings and the total assets fall to $1.27 million. The loan amount is unchanged, so the in-house asset proportion is now $70,000 of $1.27 million = 5.5%. Breach. The cure: dispose of $5,000+ of the in-house position before 30 June of the following year (for example, a partial loan repayment from the related company to the SMSF) to bring the fund back below 5%. For trustees with in-house exposure near the cap, the bear market vulnerability is a real planning consideration.

The practical advice work for SMSF trustees is to identify any in-house exposure annually, calculate the proportion at year-end, maintain a comfortable buffer below the 5% cap, use the BRP exception properly for commercial property arrangements, only attempt 13.22C trust structures with specialist legal and tax support, and execute cure plans promptly when breach occurs. For trustees considering new related-party arrangements (lending the fund to support a family business venture, investing in a related entity startup), the question is whether the arrangement adds to the in-house exposure within the 5% cap headroom. For most SMSFs without specific BRP or 13.22C carve-outs, the answer is that significant related-party investment isn't viable through the SMSF — the 5% cap is too restrictive. The fund-as-investment-vehicle can still serve the client's retirement goals through unrelated investments; the fund-as-family-financial-support-mechanism is structurally limited.

What do worked planning examples show?

These two cases show how the 5% rule plays out for typical SMSF trustee scenarios. Illustrative only — not personal advice — using FY25-26 figures.

Case 1 — Andrew, 60, sole trustee of a $1.4 million SMSF, considering a $40,000 loan to his daughter's startup business. Andrew wants the SMSF to lend the funds to help his daughter's business get going. On these facts, the loan would be an in-house asset under SIS Act s.71 of $40,000 against a $1.4 million fund — 2.9%, well within the 5% s.83 cap. The arrangement is permissible under the in-house asset framework. The rational pathway is to confirm: the SMSF investment strategy permits the loan; the loan is documented at arm's length terms (interest rate, security, repayment schedule); the loan complies with sole purpose test under s.62 (it's an investment, not a gift); and the fund's exposure stays below 5% over time as the rest of the fund grows or shrinks. The trap to avoid is treating the loan as a soft family arrangement without arm's length documentation — at audit the loan must look like a genuine investment, not informal family support. If the loan defaults or is converted to a soft repayment schedule, sole purpose questions arise even though the 5% cap isn't breached.

Case 2 — Susan and Robert, joint trustees of a $900,000 SMSF that owns commercial premises ($600,000) leased to Robert's electrical contracting business. The lease pays market rent of $42,000/year. Susan and Robert are wondering if the lease is an in-house asset. On these facts, the lease qualifies for the Business Real Property exception in s.71(1)(g) — the property is commercial, used wholly and exclusively in business, leased at market rent to a related party (Robert's business). The lease is NOT in-house, even though Robert is a member and his business is a related party. The rational pathway is to maintain the lease at market rent (annual review, market valuation), document the BRP qualification in the audit working papers, and ensure the property remains used wholly in business (not partial residential conversion, not idle). The trap to avoid is letting the rent drift below market or letting the property be partly used for non-business purposes — either issue jeopardises the BRP exception and converts the lease into in-house, with potential breach of s.83 if the proportion exceeds 5%.

For SMSF trustees, the 5% in-house asset rule is one of the structural features that defines what the fund can and cannot do with related-party investments and loans. The rule is strict, with a wide definition of related party, narrow exceptions (BRP under s.71, 13.22C non-geared unit trust), and serious consequences for unresolved breach. The cure mechanism in s.82 provides a safety valve for inadvertent breaches when used promptly with proper documentation. For most retiree SMSFs without specific commercial property arrangements, the practical position is that family-financial-support uses of the fund are tightly constrained, and the fund's investment strategy needs to focus on unrelated investments. For SMSFs with BRP arrangements, the structure remains highly valuable and the BRP discipline (market rent, exclusive business use, proper documentation) is the maintenance work that keeps the structure compliant.

Sources

Key takeaways

  • Under SIS Act s.83, an SMSF's in-house assets — loans to, investments in, or leases with related parties — cannot exceed 5% of the fund's total assets, measured at market value at 30 June each year.
  • 'Related party' is broad: it includes fund members, their relatives (spouses, children, parents, siblings, grandparents and grandchildren), entities they control, and standard employer-sponsors, catching most family-financial arrangements trustees might assume are outside scope.
  • The Business Real Property exception under s.71(1)(g) excludes commercial property owned by the SMSF and leased to a related party's business at market rent from the in-house asset test, provided it's used wholly and exclusively in business.
  • A separate carve-out under SIS Reg 13.22C allows investment in a non-geared unit trust holding business real property, but the trust must have no borrowings, no charges over its assets, and no related-party loans of its own — many such trusts inadvertently fail these tests.
  • If the 5% cap is breached, SIS Act s.82 requires the trustee to prepare a written plan by the end of the following financial year to dispose of the excess; unresolved breaches can lead to the fund being made non-complying, with the fund's assets taxed at the highest marginal rate.

Frequently asked questions

What counts as an in-house asset in an SMSF?

In-house assets are loans to related parties, investments in entities controlled by related parties, and leases of fund assets to related parties for their personal or business use (other than qualifying business real property). Related parties include fund members, their close relatives, and entities they control — a broader group than many trustees expect.

Can my SMSF lend money to my adult child's business?

Yes, but the loan counts as an in-house asset and must stay within the 5% cap on the fund's total assets, alongside any other in-house assets. The loan also needs to be on genuine arm's length terms — interest rate, security, and repayment schedule — to satisfy the sole purpose test, not treated as informal family support.

Does leasing SMSF-owned property to my own business breach the in-house asset rules?

Not if it qualifies for the Business Real Property exception: the property must be commercial (not residential), used wholly and exclusively in the business, and leased at market rent under a proper written agreement. Meeting these conditions means the lease isn't treated as an in-house asset at all, regardless of the 5% cap.

What happens if my SMSF's in-house assets exceed 5%?

Under SIS Act s.82, the trustee must prepare a written plan by the end of the following financial year to dispose of the excess and bring the fund back under 5%, typically through loan repayment or sale of the related-party investment. If the breach isn't resolved, the ATO can make the fund non-complying, resulting in the fund's assets being taxed at the highest marginal rate, plus administrative penalties on trustees.

A note on advice. This article is general information only and doesn't account for your personal circumstances. Everyone's situation is different — before acting, it's worth talking it through with a licensed adviser who knows your full picture.