The rules you can’t break

The ATO does not care that you did not know. Neither does your auditor. Here are the rules that end funds, and the one exception that powers the best strategy in this book.

Here is the good news about SMSF rules: the list of mistakes that can genuinely wreck you is short. Maybe half a dozen items. You can learn them in an afternoon.

Here is the bad news: the penalties for breaking them are brutal, ignorance is not a defence, and every single one of them is the kind of thing a reasonable person might do without realising it was illegal.

Renting your fund’s property to your daughter at full market rent? Illegal, in almost every case.

Staying one night in your fund’s holiday unit while you fix the deck? Illegal.

Selling your investment unit to your own fund at a price backed by three independent valuations? Still illegal.

Letting your business pay rent to your fund a bit late because cash flow was tight, without chasing it the way a real landlord would? That one can poison the asset’s tax treatment for good.

None of those people felt like criminals. All of them broke the law. So let us make sure you never join them.

The sole purpose test: the rule that rules them all

Section 62 of the superannuation law says your fund must be maintained for the sole purpose of providing retirement benefits to members, or to their dependants if a member dies.

Sole purpose. Not main purpose. Not mostly. Sole.

Every decision your fund makes has to pass this test. Every investment, every transaction, every dollar in and out. The question is always the same: does this exist to fund retirement benefits, or is someone getting a benefit today?

The moment your fund starts providing present day benefits to you, your family or your mates, you have a problem. And “benefit” is read broadly. It is not just money. It is use. It is enjoyment. It is convenience. It is the warm feeling of doing your niece a favour on the rent.

Some real world examples of how people fail it:

• Buying a holiday house through the fund and staying there “occasionally”
• Buying a property and renting it to your son at market rent, because the benefit is that your son gets housing from your super
• Storing your boat in the fund’s warehouse over winter
• Buying artwork through the fund and hanging it in your hallway
• Choosing an investment because it helps a mate’s business rather than because it is the best available return

Here is the simplest version of the test I can give you, and it is the one I want you to memorise. If you cannot explain a transaction to a sceptical stranger in one sentence, without using the word “technically”, do not do it.

“The fund bought a warehouse and leases it to an unrelated logistics company at market rent.” Passes.

“The fund bought a beach house that we technically only use for inspections.” Fails. You heard it fail, didn’t you?

That is the whole game. Everything else in this chapter is detail.

Who counts as a related party?

A lot of the rules below hinge on whether someone is a “related party” of your fund. The definition is wide. It catches:

• Every member of the fund
• Relatives of members: parents, grandparents, siblings, children, grandchildren, spouses, and the spouses of all of those
• Business partners of members, and their spouses and children
• Companies and trusts that members (alone or with their relatives and partners) control

Appendix E has the full working list. The short version: if you are wondering whether someone is related, they probably are. The definition was written to close loopholes, not to be sporting.

Buying assets from related parties: the general rule is no

Section 66 of the superannuation law prohibits your fund from acquiring assets from related parties. Not “at a dodgy price”. At all.

This surprises people constantly, so let me say it plainly. You cannot sell your investment unit to your SMSF. Not at market value. Not with three independent valuations. Not with a contract drawn up by the best lawyer in town. The prohibition is on the transaction itself, not the price.

There are exactly three exceptions that matter:

1. Listed securities, bought at market value. Your fund can buy your BHP shares from you at the market price.
2. Business real property, bought at market value. The big one. More in a moment.
3. Certain in-house assets, within the 5 per cent limit described below.

That is the list. Residential property is not on it. There is no path, none, by which your fund can buy a house or unit from you, your family or your business partners.

The Sophie temptation

Helen and Bruce’s fund owns a tidy three bedroom house in Melbourne’s east. Sophie, their daughter, was paying eye watering rent for a flat half its size. Over Sunday dinner, the obvious idea landed: why not rent the fund’s house to Sophie? She would pay full market rent, they would get a reliable tenant they trusted, everyone wins.

It feels harmless. It is a breach.

Here is why. When a fund leases residential property to a related party, and Sophie is about as related as parties get, the property becomes an in-house asset. In-house assets are capped at 5 per cent of the fund’s total assets. The house is worth around 70 per cent of Helen and Bruce’s fund. The moment Sophie’s lease started, the fund would be in breach of the in-house asset rules, with the ATO able to force them to unwind it, and administrative penalties on top.

Market rent does not save it. Good intentions do not save it. The rule targets the relationship, not the price.

Their accountant caught it before anything was signed. Sophie kept renting elsewhere, and Helen and Bruce learned the lesson that anchors this chapter: with related parties, “obviously fine” is not a legal category.

Now, here is what makes that story interesting rather than just depressing. Change one word and the answer flips. If the fund’s property had been Bruce’s warehouse instead of a house, leasing it to a related party would have been perfectly legal. Which brings us to the exception that powers the best strategy in this book.

Business real property: the great exception

Business real property, BRP for short, is property used wholly and exclusively in one or more businesses. A warehouse. A shop. An office. A medical suite. A farm.

For BRP, and only BRP, the law opens two doors that stay firmly shut for everything else:

1. Your fund can buy it from a related party, provided the price is market value. You can sell your business premises to your own fund.
2. Your fund can lease it to a related party without it becoming an in-house asset. Your business can rent its premises from your fund.

Put those together and you get the flagship strategy of chapter 8: your fund owns the premises, your business pays market rent to your fund, and money that used to build a stranger’s wealth builds your retirement instead. Since 10 August 2026, BRP is also the only category of real property your fund can borrow to buy. The exception did not just survive the reforms. The reforms rebuilt the whole game around it.

Two precision points, because the definition is where people come unstuck.

“Wholly and exclusively” means what it says. A shop with a flat upstairs is generally not BRP unless the residential part is incidental to the business use. Your home office does not make your house BRP. The main carve out runs the other way: on a working farm, a house does not spoil the definition provided the area used for residential purposes is no more than two hectares and the predominant use of the land remains primary production. Farmers can genuinely hold the family farm, house included, inside super.

And “used in a business” is a live test, not a zoning category. Vacant land usually fails, even commercial zoned land, because nothing is being conducted on it. Established premises with a tenant running a business pass comfortably. Anything unusual, mixed use, part vacant, brand new and never occupied, needs specific advice before you sign. Chapter 10 comes back to this when we talk borrowing.

Arm’s length, and the tax that enforces it

Every transaction your fund makes must be on arm’s length terms: the terms two strangers would agree to. Market price when buying. Market rent when leasing. Market interest if the fund borrows from a related party. Commercial behaviour throughout, including chasing arrears the way a real landlord would.

The enforcement mechanism is a nasty piece of tax law called NALI, non-arm’s length income. Understand it once and you will never be tempted to cut a corner.

The rules were rebuilt in 2024, so ignore anything older you may have read. The modern position, current as I write in 2027, works like this.

Breaches tied to a specific asset are catastrophic for that asset. If your fund acquires an asset below market value, receives above market rent from your business, or has a related party pay for capital improvements the fund should have funded, then all the income from that asset, and the entire capital gain when it is eventually sold, is taxed at 45 per cent instead of 15 or 10 or zero. Worse, where the breach relates to acquiring or improving the asset, the taint is permanent. It does not wash out when you fix the paperwork. One mate’s rates arrangement in year one can cost you close to half the capital gain in year twenty.

Breaches on general fund expenses are capped, but still expensive. If your accountant mate does the fund’s books for free, the shortfall between what was paid and market price is taxed at 45 per cent, capped at twice the shortfall. Painful, not fatal.

Notice the asymmetry. The specific asset rules are the ones that can vaporise a property strategy, and property is exactly where they bite: purchase price, rent, and improvements. Chapter 8 turns this into a practical checklist for the premises strategy, because that is where the temptation to be generous to yourself, in either direction, is strongest.

One more thing people miss: NALI cuts both ways. Charging your own business rent above market is a breach, not a clever way to stuff extra money into super. The test is market terms, full stop.

In-house assets: the 5 per cent rule

An in-house asset is, broadly, a loan to a related party, an investment in a related company or trust, or an asset of the fund leased to a related party.

In-house assets cannot exceed 5 per cent of your fund’s total assets, measured at market value, and re-measured every 30 June. Because direct property is lumpy, in practice the rule means a fund cannot lease property to a related party at all, unless the property is BRP. That is what caught the Sophie plan, and it is what makes the warehouse version legal.

If markets move and your in-house assets drift above 5 per cent, you are required to prepare and execute a written plan to bring them back under. This rule catches people who lend a “temporary” $30,000 from the fund to their struggling business. Do not do that either. Loans from your fund to members or their relatives are prohibited outright, at any percentage.

The rest of the list

The remaining prohibitions, quickly, because they are simpler:

• No personal use of fund assets. Not the holiday house, not the warehouse for your jet ski, not one night, not one weekend.
• No early access. Your super is locked until you meet a condition of release. Every scheme that promises otherwise is illegal, and the promoters are usually the only ones who get paid.
• No borrowing, except through a properly structured limited recourse borrowing arrangement, which since 10 August 2026 means business real property only. Chapter 10 covers the mechanics.
• No charges over fund assets. You cannot use fund property as security for anything outside the LRBA itself.
• Keep fund assets separate. Fund money in fund accounts, fund property on fund titles. Mixing personal and fund assets is one of the most commonly reported breaches, and one of the easiest to avoid.

What happens when people break the rules

The ATO’s penalty toolkit, in escalating order:

Administrative penalties. Fixed dollar fines per breach, and here is the sting: with individual trustees, each trustee cops the penalty personally. Four members, four fines for the same mistake. A corporate trustee wears one penalty. Penalty units get indexed, so I will not quote a dollar figure that will be stale by the time you read this; the current numbers are on the ATO site, and “five figures per trustee for a serious breach” is the right mental bracket.

Directions. The ATO can direct you to complete trustee education, or to rectify a breach within a set time. Ignoring a direction is itself an offence.

Disqualification. They can ban you from ever being a trustee again, which for a two member fund is existential.

Non-complying status. The nuclear option. A fund declared non-complying is taxed at 45 per cent, not just on that year’s income, but effectively on the fund’s assets. Nearly half of everything you have built, gone. This is rare, reserved for serious or repeated breaches, but it is the backstop that gives everything above it teeth.

Criminal prosecution. For the deliberate stuff: illegal early access schemes, fraud. Not you, because you are reading this book.

How do they find out? Mostly because the system is designed so they cannot miss. Every SMSF is audited every year by an approved independent auditor, and auditors are legally required to report contraventions to the ATO. Add land titles data, rental bond boards, bank data matching and the fund’s own annual return, and the honest summary is this: assume everything is visible, because it more or less is.

The mindset that keeps you safe

Reading this chapter, you might feel like the rules are a minefield. They are not. They are a well marked path with signs every few metres. People who blow up almost never do it by accident in the middle of the path. They do it by convincing themselves the signs did not apply to their situation.

So borrow the auditor’s mindset. Before any transaction involving your fund, ask: how would I explain this to someone whose job is to be suspicious of me? If the explanation is one clean sentence, proceed. If it needs a paragraph, a diagram and the word “technically”, stop and call your accountant.

The rules are strict. They are also learnable, stable at their core, and, for the business premises strategy in particular, surprisingly generous once you know where the marked path runs.

Find your sweet spot, or have the guts to walk away.