“Provided they are established and operated in accordance with SIS Reg 13.22C, the SMSF investment is not an in-house asset even if it, directly or via associated parties, controls the entity,” Mr Busoli noted.

“If, however, the entity is not operated correctly the exemption is lost and the SMSF’s investment becomes an in-house asset.”

This loss is permanent, he warned, so the consequence usually involves the SMSF selling down its holding to comply with the 5 per cent in-house asset limit.

One of the common breaches that can catch out clients, he said, is borrowing, as the definition is broad and even catches a small overdraft on the entity’s bank account.

“Unpaid formation costs should be regarded as creditors, not loans,” he clarified.

Mr Busoli warned that failing to pay a distribution to an SMSF can create a loan from the SMSF.

A breach can also occur from repaying overpaid distributions to the SMSF, he said, “thus making them a loan, rather than treating them as a prepayment and netting them off the next year”.

Using an unapproved cash account will also result in a breach, he cautioned.

“The cash account must be with an authorised deposit-taking institution within the meaning of the Banking Act 1959,” he explained.

Breaches can also occur from conducting a business, he added.

“The entity can build but be careful as multiple properties, or a single property with a quick sale, could breach this provision,” he warned.

Another common breach is acquiring the property from a related party that is not business real property.

“The absence of a binding lease with a related party tenant of business real property or the related party failing to pay its rent [are also common breaches],” he said.

Mr Busoli said he suspects that a number of breaches have been disregarded in the past as many auditors did not bother to scrutinise the internal dealings of the unlisted entity.

“This has now changed. The ATO has made it quite clear that auditors must look into these entities as part of the SMSF audit standards so I expect that this will result in some tense discussions going forward,” he said.