Related Party Loans

A related party loan is where the Members of an SMSF act as the Bank towards the Fund. They will lend money to the SMSF instead of a Bank. A line of credit mortgage can be used for Members to obtain the Loan in their personal capacity and then on-lend the money to the SMSF. The typical structure is set out below:

The structure for the related party loan can be more cost effective because there is no legislative requirement to set up a Corporate Trustee and a Custodian Trustee. The related party loan can be simply held by the Bare Trust/Custodian Trust with Individual Trustees. Unlike a related party loan, if the SMSF intends to buy properties with bank loans, a Corporate Trustee and a Custodian Trustee are required to be set up by most Banks.

When we set up the related party loan structure for your SMSF, we will provide you with all the necessary documentation and also a loan schedule showing the loan details and the monthly repayment. The sample loan repayment schedule is noted below.

Arm’s Length & Commercial Terms

It’s important to ensure the terms of lending to the SMSF are on an arms-length basis and issued on commercial terms. This means the Members need to charge a reasonable amount of interests on the loan to the SMSF. The ATO provides the annual LRBA safe harbour interest rates as noted in the table below:


Real Property

Listed Shares or Units

2018 – 2019



2017 – 2018



2016 – 2017



2015 – 2016




There is a school of thought that argues zero % interest related party loans is acceptable, however we believe this could put the Fund in risk as the transactions are not on an arm’s length basis.


Can I use the Terms and Conditions from a Commercial Lender rather than the Safe Habour Rulings for the Related Party Loan in my SMSF?

Safe harbour rulings is a safety net. If SMSF Trustees choose to use this rate or the terms noted in the safe harbour provisions, Trustees can have certainty that the non-arm’s length income (NALI) provisions won’t apply to the arrangement.

If the Trustee chooses not to apply the guidelines, that doesn’t mean that the Fund automatically triggers the NALI provisions. It just means that the Fund doesn’t have the certainty of that safety net.  The Trustee needs to be able to demonstrate that the arrangement is consistent with a commercial dealing. The Trustee will need some documentary evidence that the Related Party Loan’s terms and conditions are the same as those available from a commercial financier.

The following is an sample reasoning noting the Loan terms and conditions are on commercial terms and at market rates:

The Interest Rate shall be 6% being a commercial term based on Trustees objective is to execute the loan on commercial terms and on an arm’s length basis
1. Interest rate – based on a commercial interest rate at 6% charged by a commercial financier
2. Loan term/period – continuation of existing loan term which is 30 years and 27 years remaining
3. Loan Amount – more conservative LVR ratio than current arrangement
4. Conditions – Loan agreement, Loan schedule and Minutes
Formal execution by signing and executing the loan agreement and repayment schedule.

Can I refinance my existing Bank Loan in the SMSF with a Related Party Loan?

As per Section 67A(1)(a)(ii) of the SIS Act 1993,  the Trustee of an SMSF can refinance an existing borrowing provided it is over the single acquirable asset the subject of the borrowing and no other asset.  As such a new related party loan can replace some or all of the existing Bank LRBA.  Please note the monies from the related party lender should be transferred directly to the Bank to ensure the SMSF meets the requirements of the law applying to LRBAs.  It is the Trustee’s responsibility to register the related party mortgage over the property as per the safe harbour rulings.

Safe Harbour Provisions

The Tax Office has recently published a practical compliance guidance (PCG 2016/5) which sets out the recommended interest rate and the loan terms (called ‘safe harbour’ terms) for a related party loan. For SMSF Trustees with Limited Recourse borrowing arrangements (LRBAs) which do not meet the ‘safe harbour’ terms in the practical compliance guidance cannot be assured that the Commissioner will accept the arrangement to be consistent with an arm’s length dealing. However, this does not mean that the arrangement is deemed not to be on arm’s length terms. It merely means that there is no certainty provided under the practical compliance guidelines. Trustees will need to be able to otherwise demonstrate that the LRBA was entered into and maintained on terms consistent with an arm’s length dealing. Please note a sample loan repayment schedule here:

Sample Loan Repayment Schedule

An SMSF cannot lend money to a related party

Although the Members of an SMSF can lend money to their Super Fund, the SMSF cannot give a loan to a related party. It is regarded as providing financial assistance to Members and breaches the Sole Purpose Test. Please see the ATO video below for more information:

SMSF Loans & Early Access

For details on the structure to be set up for the Bank Loan, please refer to this page.

  • Leesey Aung

    Dear Sir,
    Can SMSF lend money to member on arm length and commercial terms?

  • superannuationwarehouse


    Under no circumstances can an SMSF lend money to a member or do any financial assistance to a Member or a related party of the Memebr. This include any family membersof the Member..

    The reason for this is the Sole Purpose Test – each investment has to be done for the sole purpose of the retirement benefit objective. More here:


  • Leesey Aung

    Thanks and noted.

  • Mike

    We are considering a SMSF to purchase a property.

    As we don’t have enough in our SMSF to buy outright, we are looking at other options.

    I notice on your website you mention :

    · Trustees can also lend to the SMSF, so it’s possible to do it without a bank

    Do we need to go through the expense of setting up the bare trust if we simply lend the money to the SMSF ?

    (We would be doing a redraw on our current home loan)

    • superannuationwarehouse


      You can do a loan to your SMSF. In effect, you become the bank to your Fund. This is called a related party loan.

      The lender (you) will not require two Pty Ltd companies to be set up over the SMSF and Custodian Trust. So the requirements are less stringent. But the SMSF cannot have any loans within the SMSF. This is a S67 prohibition. Therefore the need for a Custodian Trust.

      We have a lawyer that can set this up. Note this is a requirement to have it in place for the SMSF to be a compliant Fund.

      Please advise if you want us to proceed.

  • Szy

    Hi, I am about to set up my SMSF and roll funds into it, and I want to invest in a private company with this SMSF. There’s a short deadline to purchase (the shares) and given that the funds from roll-over may take a while, can I lend money (short term) to the SMSF to buy the shares as the SMSF and then recoup the loan once the rolled funds arrive? I need the loan repaid as I need that loaned amount (to remain outside the SMSF) for another venture.

  • Graham Fidler

    Hello Hein,

    I want to make sure I have been clear on what I would like to do here….

    I want by SMSF to make a loan to a related party of the fund. The load would be from the SMSF to the related party on arms length commercial terms and the loan amount would be under the 5% in-house asset rule.

    I wanted to clarify as your web link referenced a related party loaning money to the SMSF.

    I am wanting the SMSF to make a loan to the related party.

    Is your advice that this can still be done if we are under the 5% in house asset ruling and the loan in on arms length commercial terms.



  • ming

    hi Hein,

    We interested to set up a SMSF to invest in property.
    How much it cost to set up a SMSF and Custodian Trust with Individual Trustees and a Related Party Loan agreement?

    after set up , if we just holding one property , will the monthly fee of $79 cover all the annual compliance cost?

    additionally, later on down the track, if we want to refinance the property use a bank loan instead of the related party loan, do we have to change to a Corporate Trustee for both Custodian Trust and SMSF? what would be the cost involved ?

    • Hein Preller


      From your question, it seems as if you would like to do a related party loan. We give guidance on some points to look out over here:

      To set up an SMSF with individual Trustees is $150. For a bare trust, it is $950. Our fee schedule is here:

      The potential issue with refinancing to a bank is that their requirements may be totally different. They may require a Corporate and or a Custodian Trustee. The Trust format they require is also different from a related party loan. Although there is no legal requirement for these Trustee entities (it can be performed by individuals) the bank may not issue the loans if the structure is not in line with their requirements. In this case, we may have to set it up again, so there’s extra charges. Best would be to decide on the best structure going for the longer terms if you are cost-conscious. See a typical structure here:

      Lastly, the fees we charge is for accounting, tax and audit and that is what the $79 per months is for.

  • Kathryn McCamish

    Related Party Loans, we are going to get a personal loan from a bank to then borrow to our SMSF to finalise funds for an investment property. Can we link the Related Party Loan to the bank we borrow from so Rents go to them directly and provide addition security to loan application?

    • Hein Preller


      The norm is for the SMSF to receive the rent. From there, the SMSF can pay the bank directly from its own bank account.

      You can set up a direct debit from the SMSF bank account to pay the line of credit. The effect will be that you in effect on-lend the money to your SMSF and its paid back to the bank on the same terms and conditions as what you have with the bank. You are in effect a conduit for the loan.

      Trust this makes sense.

  • Totally Regal Performance Hors

    My parents and I own a farm that they want to sell to my SMSF – I own 50% and they own the other 50% – can the SMSF become tenants in common with me and my parents provide the other 50% of the property to the SMSF and the SMSF pays them regular monthly payments?

    • Hein Preller


      A farm is regarded a commercial property for SMSF purposes. This is good news as the rules are more lenient than residential property.

      For an SMSF to purchase an asset, in this case an interest in a commercial property, it has to be done at commercial terms and an arms-lenght basis. So the SMSF must pay for its interest from the seller. Also keep in mind, this must be for the sole purpose of your retirement benefit and not to help out family members. For some rules around property purchases, see the ATO guidelines here:

      Lastly, if your parents sell their portion in the farm, they will not earn income from it as they no longer own the asset.

      Trust this answers your question.

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Superannuation Warehouse is an accounting firm and do not provide financial advice. All information provided has been prepared without taking into account any of the Trustees’ objectives, financial situation or needs. Because of that, Trustees are advised to consider their own circumstances before engaging our services.