What is the 5% in-house asset test?
A limit on how much of the fund can sit with related parties. The ATO says the market value of in-house assets must not be more than 5% of the market value of the fund's total assets. Where an SMSF holds an in-house asset, the ATO's guide to valuing SMSF assets says the value of all assets must be determined at the end of the income year, so the percentage can be tested.
The ATO's page on SMSF investment restrictions describes an in-house asset as any of these:
- a loan to a related party of the fund
- an investment in a related party of the fund
- an asset of the fund that is leased to a related party, such as business equipment or machinery
The same page lists exceptions, including business real property leased between the fund and a related party and some investments in related non-geared trusts or companies. Whether a particular holding is an in-house asset, or is excepted, is for the trustees and their advisers. We value.
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What does the arithmetic look like?
What happens if the fund is over the limit?
The ATO says that if in-house assets exceed 5% at the end of the financial year, the trustees must prepare a written plan to reduce them to 5% or below. The plan must be prepared before the end of the following financial year, and the trustees must ensure it is carried out.
The ATO also says that where the investment restrictions are not followed it may impose penalties, make the fund non-complying, disqualify trustees or prosecute them. How to reduce in-house assets, or whether an exception applies, is for the trustees and their advisers. A reliable valuation shows how far over, or how close to, the limit the fund is.
What do we value for the test, and what do we need?
We value the shares in the related company or the units in the related trust, not the whole fund. The trustees or their administrator hold the values of the other assets: the ATO says cash, managed funds and listed securities are easily valued and should be valued at each year end, and units in widely held trusts and managed funds should use the published exit price. Where the related entity owns property, we value the units or shares using a property valuation from a registered or certified property valuer that you already hold. We never sign a property figure ourselves. Our report gives the market value at the test date, and the trustees or their administrator run the percentage.
- the company constitution or trust deed
- financial statements at the test date and recent management accounts
- any property valuation from a registered or certified property valuer, where the entity owns property
- what the fund paid for the shares or units, and when
- the fund's list of assets at the test date
Documents come only through the private upload link on your matter, never by email. Investment entity: $995 + GST, with delivery in 2 business days. Delivery time starts once payment and all required information have been received. Trading business fees follow turnover on our pricing page. We confirm the fee in writing before we start. No hourly billing. The valuer is independent of your fund: never a member, trustee or related party of it.
How we value it, and what it costs
Investment entity
Unit trust or company holding property, cash or listed investments
$995 + GST
Report in 2 business days
Trading business, smaller
Annual turnover under $2 million
$1,495 + GST
Report in 2 business days
Trading business, established
Annual turnover $2 million to $10 million
$2,495 + GST
Report in 3 business days
Trading business, larger or complex
Annual turnover over $10 million, or a complex structure
$3,495 + GST
Delivery agreed before we start
Annual 30 June update
A valuation we prepared last year, same entity, no restructure or major change
$495 + GST
Report in 2 business days
We confirm the fee in writing before we start. No hourly billing. Delivery time starts once payment and all required information have been received. How our fees work
Questions we are often asked
Is exactly 5% a breach?
The ATO's wording is that in-house assets must not be more than 5% of total assets, so 5% on the dot is within the limit. Values move, so a fund close to the limit should test it on a current value.
When is the 5% tested?
The ATO says the value of all assets is determined at the end of the income year to see whether in-house assets exceed 5%. After a significant event, it says to get a new valuation, use one obtained after the event or find alternative evidence.
Do I need an independent valuation for the test?
Not as a rule. The ATO says an external valuation need not be done for all assets each year, though it may be prudent where a value is likely to be materially inaccurate. For a significant or complex related entity the ATO recommends a qualified independent valuer.
What if the fund held in-house assets before 11 August 1999?
The ATO says the in-house asset rules for assets owned before 11 August 1999 were defined differently, and trustees should review those investments against the current rules. That is a legal question for the trustees' adviser.
Which arrangements count towards the 5%?
The ATO lists loans to related parties, investments in related parties and assets leased to related parties, subject to exceptions. We value the shares and units. The other figures come from the trustees' records.
Can you tell us whether our holding is an in-house asset?
No. We value the shares or units. Whether they are an in-house asset, and whether an exception applies, is for the trustees and their advisers.
Short answers
- How do you value units in an SMSF unit trust?Value the trust's assets and liabilities at market value, then work out what the fund's units are worth under the trust deed. The ATO says to...
- Can an SMSF buy shares from a related party?Generally no. Super law prohibits an SMSF from acquiring assets from a related party, with exceptions such as listed securities, business real...