In-house asset breach in an SMSF, and what the auditor checks
What an in-house asset is under section 71 of the SIS Act, the 5 percent limit in sections 82 and 83, how the ratio is calculated on market value under regulation 8.02B, and what an SMSF auditor checks.
By Tash ·
An in-house asset breach happens when a self-managed super fund holds more than 5 percent of its assets, measured at market value, as in-house assets at the end of a financial year. An in-house asset is a loan to, or investment in, a related party of the fund, an investment in a related trust, or a fund asset leased to a related party. The rules sit in Part 8 of the Superannuation Industry (Supervision) Act 1993.
What counts as an in-house asset
Section 71 of the SIS Act defines the term. Three things commonly fall inside it:
- A loan from the fund to a related party, such as a member or a member’s business.
- An investment in a related party or a related trust, such as units in a family unit trust.
- A fund asset that is leased to a related party, such as a residential property rented to a member.
A related party covers fund members, their relatives, their business partners, and entities those people control. Business real property leased to a related party is a common exception and is not an in-house asset, which is why the leased-property test turns on what the property is, not just who rents it.
The 5 percent limit
Sections 82 and 83 set the limit. At 30 June, the market value of a fund’s in-house assets must not exceed 5 percent of the market value of all the fund’s assets. The test is a year-end test, so a fund can move above 5 percent during the year without breaching, as long as it is at or below 5 percent on 30 June.
If the ratio is above 5 percent at year end, the trustee must prepare a written plan to reduce in-house assets below 5 percent, and act on that plan, by the end of the following financial year. A breach that is not corrected compounds, because the excess remains an in-house asset into the next year.
How the ratio is calculated, and why regulation 8.02B matters
The ratio is calculated on market value, not cost. Regulation 8.02B of the SIS Regulations 1994 requires that fund assets be valued at market value for the accounts and statements. A fund that records a related-party investment at historical cost can report a ratio under 5 percent while the market-value ratio is over it. The valuation basis is the first thing to confirm before the ratio means anything.
What the SMSF auditor checks
The auditor works through a short, specific sequence:
- Confirm assets are recorded at market value for the year, as regulation 8.02B requires.
- Identify every related-party loan, investment, and lease under section 71.
- Test the unit trust holdings against regulations 13.22C and 13.22D, since a compliant non-geared related trust is excluded until a 13.22D event occurs.
- Calculate the in-house asset ratio at 30 June on market values.
- Where the ratio exceeds 5 percent, check for a written rectification plan and evidence the trustee acted on it.
If the breach meets the reporting criteria, the auditor lodges an Independent Auditor Contravention Report with the ATO. The auditor reports the contravention. The auditor does not fix it; rectification is the trustee’s obligation.
The unit trust exception worth getting right
Regulation 13.22C carves out investments in non-geared unit trusts that meet a set of conditions, including that the trust holds no borrowings and no in-house assets of its own. Regulation 13.22D lists events that end the exception, such as the trust taking on a borrowing or acquiring an interest in another entity. A holding that qualified in a prior year can fail this year if a 13.22D event occurred, so the test is run every year, not once.
Where this fits in the audit
The in-house asset test is reading and reconciling: pull the related-party register, confirm market values, identify the leases and loans, run the ratio, and document the plan if there is a breach. The manual workflow in Cora walks this test free. When you want the reading and reconciling done for you, Auto identifies the related-party items, computes the ratio on market value, and flags a likely breach with the transactions behind it, for your review and sign-off.
Common questions
- What is an in-house asset in an SMSF?
- An in-house asset is a loan to, or investment in, a related party of the fund, an investment in a related trust, or a fund asset leased to a related party. It is defined in section 71 of the SIS Act 1993.
- What is the 5 percent in-house asset limit?
- At the end of each financial year, a fund's in-house assets must not exceed 5 percent of the total market value of all its assets. The limit sits in sections 82 and 83 of the SIS Act 1993.
- What happens if an SMSF breaches the 5 percent limit?
- If in-house assets exceed 5 percent at 30 June, the trustee must prepare and act on a written plan to bring them below 5 percent by the end of the next financial year. The auditor may also need to lodge an Independent Auditor Contravention Report with the ATO.
- How does an SMSF auditor check the in-house asset ratio?
- The auditor values assets at market value as required by regulation 8.02B, identifies related-party loans, investments and leases under section 71, calculates the ratio at year end, and checks for a rectification plan where the ratio exceeds 5 percent.
- Are all related unit trust investments in-house assets?
- Not always. An investment in a non-geared unit trust that meets the conditions in regulation 13.22C is excluded, unless an event listed in regulation 13.22D occurs and ends the exclusion.