If your fund has any connection to a business or entity you are involved with, this is the rule that governs it, and it is worth understanding properly because it is easy to breach by accident.
An in-house asset is broadly a loan to, an investment in, or a lease arrangement with a related party of the fund. Related parties include the members, their relatives, and companies and trusts the members control.
The rule is that in-house assets cannot exceed 5 per cent of the market value of the fund's total assets.
Where it catches people
Shares in your own company. If your fund holds shares in a private company you control, that holding is an in-house asset. A $50,000 shareholding in a fund with $700,000 of assets is already over 7 per cent.
Units in a related unit trust. Unless the trust satisfies the non-geared unit trust exceptions, which are specific and require ongoing compliance, the units are an in-house asset.
Leasing an asset to a related party. Leasing a vehicle, plant or equipment to your business makes that lease an in-house asset.
The big exception. Business real property leased to a related party on commercial terms is specifically excluded. That is why the structure of business premises inside a fund matters so much, and why the definition of business real property is now doing double duty since the borrowing changes.
The bit that catches people out
The test is applied at 30 June, on market value.
Which means you can be perfectly compliant all year and breach the limit without doing anything, simply because the rest of the fund fell in value. If your fund holds units in a related trust and the listed portfolio has a bad June, the percentage moves against you.
What happens if you exceed it
You are required to prepare a written plan before the following 30 June setting out how you will reduce the in-house assets back under 5 per cent, and then you have to actually execute that plan.
The plan needs to exist. Intending to sell something is not a plan. Your auditor will ask for it and, if it is not there, will report the breach.
What to do about it
Know what your fund's in-house asset percentage is now, not in April. If it is sitting at 4 per cent, you have very little room and a market movement can take you over.
If you are anywhere near the limit, get the valuations done early so you know where you stand while you still have time to act.
And if your fund holds anything connected to your own business, have someone check the classification. The difference between an in-house asset and an excluded one often comes down to how the arrangement is documented, and that is fixable in advance and expensive to fix afterwards.