A property developer offers your SMSF units in a trust that is putting up townhouses. A friend's syndicate is buying a childcare centre. The returns look good and the paperwork looks professional.
The question that decides whether the fund can hold it is not about the returns. It is whether the trust is related to your fund — and most trustees answer that question by looking at the wrong thing.
The rule the answer sits under
Section 71 of the SIS Act defines an in-house asset. Among other things, it captures an investment in a related trust of the fund. In-house assets are capped: their total market value must not exceed 5% of the fund's total assets, at any time. Exceed it, and the trustee has to rectify — generally within twelve months.
So an investment in a related trust is confined to a corner of the fund. An investment in an unrelated trust is not caught by the cap at all.
Which makes "is it related" the whole question.
Why the percentage is not the test
Trustees tend to reach for a number: we only hold 8%, so we are fine.
The percentage matters, but it is not the test on its own. A trust is a related trust if it is controlled by the fund or by a Part 8 associate of it. Control is assessed on the whole picture: units held by the fund and by its related parties combined, and whether there is any other means of control — a right to appoint the trustee, a veto, a majority on decisions, an arrangement that means the trust acts in accordance with your wishes.
The ATO has taken the view that a trust is not a Part 8 associate where the fund and its related parties together hold less than 10% of the units and have no other control over the trust. Both limbs. Under 10% with a right to appoint the trustee is not an unrelated trust.
The word doing the work is combined. Your fund's 8%, your brother's 4% and your family trust's 3% are added together, and the answer changes.
The related trust that is allowed anyway
There is a second path, and it is the one people confuse with the first.
An investment in a related unit trust is excluded from the in-house asset definition if the trust satisfies Division 13.3A of the SIS Regulations — the conditions in regulations 13.22B and 13.22C. The common name for it is an ungeared unit trust, and the conditions are strict: the trust cannot borrow, cannot lend, cannot have a charge over its assets, cannot hold an interest in another entity, cannot acquire an asset from a related party other than business real property.
The trap is not qualifying at the start. It is ceasing to qualify later. The exception applies while the conditions are met, and a single event ends it: the trust takes out a loan to finish a stage, gives a bank a charge, accepts an asset from a related party. From that moment the units are an in-house asset, measured against 5%, and the failure is usually discovered by the auditor a year after it happened.
The ATO has said as much in its bulletin on SMSFs and property development: trustees often do not follow the structure in enough detail to notice the moment the exception stops applying.
What to check before the money goes in
Add up every related holding, not just the fund's. Members, their relatives, and the companies and trusts they control.
Ask what else could amount to control. Who appoints and removes the trustee. Whether any decision needs your agreement. What the constitution says, not what the promoter says.
If it is related, ask which exception you are relying on. "It is ungeared" is a claim about a set of conditions, and it needs to be checked against the trust deed and the actual borrowing position — not accepted as a description.
Ask what would end the exception, and who would tell you. For a development, the honest answer is usually that nobody would, until the audit.
Write down why you decided it was unrelated. Assessed before you invest, kept on file. Reconstructed after an auditor raises it, the same reasoning is worth much less.
The part worth saying plainly
An unrelated trust with genuinely independent promoters is an ordinary investment, and the in-house asset rules do not restrict it. Most of the trouble comes from arrangements that are described as unrelated because the holding is small, when the fund or its related parties hold something that amounts to control — or from ungeared trusts that were compliant on the day the units were bought and stopped being compliant when the development needed money.
Neither is exotic. Both are found late.
Rules stated here are current as at September 2026. The in-house asset definition is in section 71 of the SIS Act; the ungeared unit trust conditions are in Division 13.3A of the SIS Regulations, regulations 13.22B and 13.22C. See also SMSFR 2009/4 on the meaning of related trust, and SMSF Regulator's Bulletin SRB 2020/1 on property development. General information only — confirm the position against your own trust deed and current ATO guidance before acting.
Adapted from The Self-Managed Super Fund Handbook by Paul Yang. See the books.