A self-managed super fund offers considerably more investment choice than a retail or industry fund, though that choice sits inside a defined regulatory framework. The sole purpose test, the in-house asset rules, the related party acquisition rules and the borrowing prohibition apply to every investment decision a trustee makes. Understanding where these restrictions actually bite helps trustees use that flexibility without breaching the fund’s compliance requirements.
One of the main reasons Australians establish a self-managed super fund is the investment flexibility it offers compared with a retail or industry alternative. That flexibility is genuine, though it operates within a specific set of SMSF investment restrictions that every trustee needs to understand before directing fund assets into a new investment.
What Can an SMSF Invest In?
The starting position is a broad range of assets, including listed shares, managed funds, cash, term deposits, direct property, unit trusts and cryptocurrency, provided every investment is permitted under the fund’s trust deed and fits within its documented investment strategy. Collectables such as artwork, wine and coins are also permitted, though these carry some of the strictest conditions of any SMSF asset class.
The unifying requirement across every asset class is section 62 of the SIS Act. The fund must be maintained to provide retirement benefits to its members, and any arrangement that delivers a present-day benefit to a member or their relatives risks breaching this test.
SMSF Investment Rules in Australia: The Core Restrictions
1. The Sole Purpose Test
This is the foundational rule underpinning every other restriction. An investment cannot provide early access to benefits or a current-day advantage to a member or their family, such as personal use of a fund asset. An incidental benefit on arm’s length terms, such as leasing business premises to a member’s business at market rent, does not of itself breach the test.
2. The In-House Asset Limit
Loans to, investments in, and fund assets leased to related parties are in-house assets, capped at five per cent of total fund assets at market value. A related party covers members, their relatives, and companies and trusts they control. Business real property leased to a related party under a legally binding lease is excluded, as are certain non-geared related trusts and companies.
3. Related Party Acquisition Restrictions
SMSFs are generally prohibited from acquiring assets from related parties. Exceptions include listed securities, business real property and in-house assets within the five per cent limit, each acquired at market value. The rule also covers in-specie contributions, so residential property or private company shares generally cannot be transferred in from a member.
4. The Arm’s Length Requirement
Every transaction must be conducted on genuine commercial terms. Where a transaction is not conducted at arm’s length, income from that asset can be classified as non-arm’s length income and taxed at the top marginal rate rather than the fund’s ordinary concessional rate.
5. No Loans or Financial Assistance to Members
An SMSF cannot lend money or provide financial assistance to a member or their relatives under any circumstances, regardless of the fund’s overall size or asset mix.
6. Restrictions on Borrowing
SMSFs are generally prohibited from borrowing, except through a limited recourse borrowing arrangement (LRBA) or limited short-term borrowing. Since 10 August 2026, a new LRBA cannot be used to acquire residential property unless a binding contract of sale was signed before that date. Existing residential LRBAs are grandfathered.
7. Collectables and Personal Use Assets
Artwork, wine, vehicles and similar assets cannot be used by related parties or stored in a related party’s private residence. Trustees must record the storage decision in writing and insure the item in the fund’s name within seven days of acquisition.
Rules this granular are easy to get wrong without someone checking the details before capital moves, which is exactly the role Rivkin SMSF plays for trustees week to week. Anyone establishing a self-managed super fund for the first time should speak with our team and structure it correctly from day one!
What Can SMSFs Not Invest In? Common Prohibited Arrangements
- Loans or financial assistance to fund members or their relatives, in any form.
- Assets acquired from a related party outside the narrow list of permitted exceptions.
- Residential property lived in or rented by a member or related party.
- Residential property purchased under a new LRBA entered into on or after 10 August 2026.
- Collectables stored at a related party’s home or used for personal enjoyment.
- Any arrangement that provides a present-day benefit rather than a genuine retirement benefit.
Non-Arm’s Length Income in More Detail
The arm’s length requirement deserves closer attention, since it catches out more funds in practice than trustees often expect. Non-arm’s length income, commonly abbreviated to NALI, arises where a fund derives income from a scheme not conducted on genuine commercial terms, or incurs expenses lower than an arm’s length dealing would involve. NALI is taxed at 45 per cent rather than the fund’s ordinary concessional rate.
How much income is caught depends on the expense. Where a related party provides a free or discounted service tied to a particular asset, such as property management, all income from that asset can be NALI, including any capital gain on sale. For general fund expenses such as accounting or administration, legislation passed in 2024 limits the NALI amount for SMSFs to twice the shortfall against an arm’s length fee, capped at the fund’s taxable income excluding contributions. Trustees performing duties unpaid in their capacity as trustee generally do not trigger NALI at all.
Avoiding a NALI finding generally comes down to documentation and genuine market pricing. Trustees engaging a related party for any service should retain evidence of market rates, such as comparable quotes, so that an auditor can see the pricing was commercially justified rather than assumed.
How SMSF Restrictions Compare to Retail and Industry Funds
Retail and industry super funds operate under a different structure, pooling members’ money into professionally managed options rather than allowing each member to direct individual investment decisions. Their trustee is a separate entity licensed by APRA. The related party and in-house asset rules technically apply to these funds too, but because members never direct transactions with their own relatives or businesses, these issues rarely arise in practice.
This is precisely the trade-off an SMSF trustee takes on. Greater investment control and flexibility come with personal responsibility for compliance obligations that a retail or industry fund member never needs to consider directly.
SMSF Prohibited Investments: Valuation and Documentation Obligations
Beyond the restrictions on what can be acquired, ongoing obligations apply to how fund assets are valued and recorded. All assets, including private company shares, direct property and collectables, must be valued at market value each financial year using objective, supportable evidence. An external valuation is not always required, though a qualified independent valuer must value any collectable sold or transferred to a related party.
Trustees must also maintain a documented investment strategy, reviewed regularly, that considers risk, return, diversification, liquidity, the fund’s ability to pay benefits, and insurance cover for members. The ATO has been explicit that a strategy allowing anywhere from zero to 100 per cent in every asset class is not considered compliant.
Summary: Restrictions by Asset Class
| Asset Class | Key Restriction |
|---|---|
| Related party investments | Capped at 5% of total fund assets under the in-house asset rules; business real property under a legally binding lease is excluded |
| Residential property | Cannot be bought from or used by related parties; cannot be acquired using a new LRBA from 10 August 2026 |
| Collectables | Cannot be used personally; must be insured within 7 days and stored away from related parties’ homes |
| Private company shares | Cannot generally be acquired from a related party |
| Loans to members | Prohibited under all circumstances |
SMSF Investment Restrictions Explained: Consequences of Getting It Wrong
Breaching these restrictions carries real consequences. Administrative penalties range from 10 to 60 penalty units per contravention, which is up to $21,840 per trustee for a single breach from 1 July 2026, and must be paid personally rather than from the fund. The ATO can also issue rectification directions or disqualify trustees. In more serious cases the fund can be declared non-complying, which strips its concessional tax treatment and can see its income and assets taxed at the highest marginal rate. Trustees are personally responsible for compliance, regardless of intent.
Keeping Records That Support Compliance
Good record-keeping is what actually allows a trustee to demonstrate compliance with every restriction covered above, rather than simply asserting it after the fact. This includes trustee minutes recording the reasoning behind significant investment decisions, valuation evidence for unlisted assets, written records of where collectables are stored, and documentation showing that related party dealings occurred on genuine market terms. Auditors and the ATO alike rely heavily on this paper trail, and a well-documented decision that later proves imperfect is generally treated far more favourably than an equally reasonable decision with no supporting records.
Frequently Asked Questions
Can my SMSF hold cryptocurrency?
Yes, provided the trust deed allows it, it fits the investment strategy, and it is held in the fund’s name and valued correctly. Trustees should be aware this remains an area of close regulatory attention.
Can my SMSF invest in a business I run personally?
It depends on the structure. Business real property leased to a related party at market rent is generally permitted, while loans to or investments in a member’s business are generally in-house assets limited to five per cent of the fund.
What happens if my fund accidentally breaches the in-house asset limit?
If in-house assets exceed five per cent at year end, trustees must prepare a written plan to reduce them during the following financial year and carry it out. Ongoing or deliberate breaches can attract more serious compliance action.
Do these restrictions apply equally to every SMSF, regardless of size?
Yes. The rules apply based on the nature of the transaction and the parties involved rather than the size of the fund itself.
Who is responsible if an SMSF breaches an investment restriction?
All trustees are responsible for compliance, even where only one was directly involved in the decision. Individual trustees can each be penalised, while directors of a corporate trustee are jointly and severally liable, which is why clear record-keeping matters for every member of a multi-member fund.
Conclusion
A self-managed super fund offers genuine investment flexibility, though that flexibility operates within a clearly defined set of rules covering related parties, in-house assets, borrowing and personal use. Trustees who understand these restrictions before acting are in a far stronger position to use their fund’s flexibility properly.
Understanding where these restrictions apply before a breach happens, rather than after, is exactly what practical, ongoing support from Rivkin SMSF is designed to deliver. For an SMSF setup service built around getting the compliance foundations right from day one, contact our specialists and put your fund on solid footing!
Important Information: “This article is general information only. Whether an investment suits your fund depends on your circumstances, so professional advice should be obtained before acting.”
