SMSF Loans And Lending: Borrow Or Lend Money Rules

Updated for the 2026–27 financial year

An SMSF is generally prohibited from both borrowing and lending money, with only limited exceptions. It cannot lend money or provide financial assistance to a member or a member’s relative under any circumstances. It can borrow only in narrow situations, the most common being a limited recourse borrowing arrangement (LRBA) used to buy a single asset such as an investment property. This guide explains what an SMSF can and cannot do, how the in-house asset rule caps related party lending, how LRBAs work, how much an SMSF can borrow, which lenders are still active, and the compliance traps to avoid.

Table Of Contents

• Can An SMSF Borrow Or Lend Money?
• Can An SMSF Lend Money?
• Can An SMSF Borrow Money?
• What Is A Limited Recourse Borrowing Arrangement (LRBA)?
• How Much Can An SMSF Borrow?
• Which Banks And Lenders Offer SMSF Loans In Australia?
• SMSF Borrowing Rules And Compliance
• Risks And Common Mistakes With SMSF Loans
• Speak To An SMSF Specialist

Can An SMSF Borrow Or Lend Money?

The short answer is that both activities are heavily restricted. An SMSF is generally prohibited from borrowing money, and it is generally prohibited from lending money or providing financial assistance to members or related parties. There are limited exceptions to each rule, and the consequences for getting it wrong can be severe.

On the lending side, the most important rule is that an SMSF can never lend money or give financial assistance to a member or a member’s relative. On the borrowing side, an SMSF can generally only borrow through a limited recourse borrowing arrangement or under a handful of short term emergency exceptions.

The rest of this article walks through each of these areas in turn, so you can understand what your fund is allowed to do and the documentation and arm’s length terms you need to stay compliant.

Can An SMSF Lend Money?

An SMSF cannot lend money or provide direct or indirect financial assistance to a member or a member’s relative. This prohibition sits in section 65 of the Superannuation Industry (Supervision) Act 1993 (the SIS Act) and there are no exceptions to it. An SMSF also cannot act as guarantor for a personal loan taken out by a member.

The ATO interprets this prohibition broadly. The following are all treated as prohibited lending or financial assistance to a related party:

• Gifting an SMSF asset to a member or their relative.
• Selling an SMSF asset to a member or their relative for less than market value.
• Purchasing an asset from a member or their relative for more than market value.

You cannot get around the rule indirectly either. Investing SMSF funds into an unrelated trust that then on-lends those funds to a member or relative may be regarded by the ATO as a breach of the super laws. You can read more about the broader investment restrictions in the ATO guidance on SMSF investment restrictions.

Lending To Third Parties And Unrelated Borrowers

An SMSF can lend to parties that are genuinely unrelated to its members, such as a friend of a member. However, the loan must comply with the relevant rules and be conducted on arm’s length terms. That means commercial interest rates, proper documentation, and normal lender protections.

Be careful with arrangements that look unrelated but are not. As noted above, lending to an unrelated trust that then channels the money back to a member or relative may be treated by the ATO as a breach.

Lending To Related Parties And The In House Asset Rule

While an SMSF can never lend to a member or relative, it can generally make loans to other related parties, such as a related company or unit trust. The catch is that such a loan is treated as an in-house asset.

The value of in-house assets, including loans to related parties, cannot exceed 5% of the value of the SMSF’s total assets. The in-house asset rules are contained in Part 8 of the SIS Act, which also includes anti-avoidance provisions designed to catch arrangements that try to circumvent the 5% cap.

The 5% limit is based on total assets at market value, not net assets. Total assets include investments such as shares, units, property and managed funds, plus cash and term deposits, tax deferred assets and debtors. The limit is measured when an asset is first acquired and again as at 30 June each year. There are some exceptions to the in-house asset rules, including leasing business real property to a related party and holding widely held investments. You can read more in this explanation of the 5% SMSF in-house asset rule.

What Happens If You Exceed The 5% In House Asset Limit

If the in-house asset percentage exceeds 5% at 30 June, the trustees must prepare a formal written plan and reduce the in-house assets back to the 5% threshold before 30 June of the following year.

An important trap is that if the threshold is exceeded, the entire in-house asset may need to be disposed of, not just the surplus portion. This can apply even if the market later rebounds so the value falls back within the 5% limit. It may be possible to request a discretion from the ATO to treat an immaterial excess as not breaching the rules, provided the in-house asset is below the 5% threshold at the following 30 June.

Documentation And Interest Rate Requirements For Loans

Before an SMSF lends money it needs an investment strategy that includes the ability to lend, and the trust deed must allow the trustee to lend. The loan must be in the best interests of members and must not place members’ benefits at risk.

The loan must also be conducted on a commercial, arm’s length basis in accordance with section 109 of the SIS Act. Getting the interest rate wrong cuts both ways:

• If the interest rate charged to a related party is too low, or the loan terms do not reserve normal lender rights, the loan may offend section 109 and may also offend the sole purpose test.
• If the interest rate charged to a related party is too high, the loan may produce non-arm’s length income, which loses concessional tax treatment and is taxed at the highest marginal rate.

A proper loan agreement should be written up and signed by all parties. It should specify the security, the repayment period, the timing and amount of repayments, the interest rate, and whether repayments are principal and interest or interest only. If the borrower is a corporate borrower, an appropriate security interest should be registered on the Personal Property Securities Register (PPSR). For more detail on the rules for SMSFs that lend money, see this guide to SMSF lending rules.

Can An SMSF Borrow Money?

SMSFs are generally prohibited from borrowing money, with only limited exceptions permitted. This general prohibition comes from the SIS Act and the Superannuation Industry (Supervision) Regulations 1994. The ATO sets out the rules in its guidance on SMSF borrowing restrictions.

The two main avenues for borrowing are the limited recourse borrowing arrangement, covered below, and a small number of short term emergency exceptions.

Short Term Borrowing Exceptions

An SMSF can borrow for short periods in limited circumstances:

• For a maximum of 90 days to meet benefit payments due to members, where the amount borrowed does not exceed 10% of the SMSF’s total assets.
• For a maximum of 90 days to meet an outstanding superannuation surcharge liability, again capped at 10% of total assets.
• For a maximum of 7 days to cover the settlement of security transactions, where at the time the transaction was entered it was likely the fund did not need to borrow, and the amount borrowed does not exceed 10% of total assets.

Can I Use My Super Or SMSF As Security For A Personal Loan?

Generally, no. Superannuation is classified as protected non-divisible property and cannot be accessed by creditors in most cases, even if you declare bankruptcy. Because a lender could not access your super if you defaulted, you are very unlikely to find a lender who will accept your super as security for a personal loan.

Once you withdraw money from super, that amount is no longer a protected asset, but to withdraw you generally need to have met a condition of release, such as the superannuation definition of retirement. Borrowing within an SMSF is only possible through an LRBA, where the asset purchased is the security and the lender’s rights are limited to that asset. You can read a fuller explanation of borrowing against your super for more context.

What Is A Limited Recourse Borrowing Arrangement (LRBA)?

Since 24 September 2007, SMSFs have been able to borrow to purchase an asset using a limited recourse borrowing arrangement. The LRBA provisions are found in sections 67A and 67B of the SIS Act.

Under an LRBA, the SMSF trustee borrows from a lender and uses the money to buy an asset, which is held in a separate holding trust. The trustee of that trust, often called the custodian or bare trustee, legally holds the asset on behalf of the SMSF until the borrowing is repaid. The asset held on trust must be one the SMSF would be permitted to invest in directly.

The borrowing must be on a limited recourse basis. That means if the SMSF defaults, the lender’s rights are limited to the single asset held in the holding trust, and the other assets of the SMSF are protected. All income from the asset is paid into the SMSF, and the SMSF is responsible for all loan repayments. An in-house asset exemption applies to the SMSF’s investment in the holding trust. An LRBA also carries implications for a member’s Total Superannuation Balance and Transfer Balance Cap, and can have income tax, capital gains tax, GST, Division 7A, land tax and stamp duty implications. The SMSF Association’s LRBA go-to guide sets out the structure in detail.

The Single Acquirable Asset Rule

The borrowing under an LRBA must be used to acquire a single acquirable asset. An acquirable asset is any form of property, other than money, that a trustee of an SMSF is not otherwise prohibited from acquiring. Money here means Australian or foreign currency, but does not extend to collectable banknotes or coins.

A single acquirable asset can sometimes be a single object of property even though it is made up of separate bundles of proprietary rights, for example two or more blocks of land. This is only the case where it is reasonable to conclude that what is acquired is distinctly identifiable as a single asset. Factors that support this include a permanent fixture attached across the titles that is significant in value relative to the asset, or a State or Territory law requiring the titles to be dealt with together. Acquiring assets under a single contract, or conducting a business across multiple titles, is not on its own enough to make them a single asset. These principles are set out in the ATO’s ruling on the single acquirable asset rule (SMSFR 2012/1). The ruling also addresses when an asset is changed so significantly that it becomes a different replacement asset.

Repairs, Maintenance And Improvements

Money borrowed under an LRBA may be applied to acquire the single acquirable asset and to carry out repairs and maintenance to that asset, whether the work is needed at the time of acquisition or later. However, assets subject to an LRBA cannot be improved using borrowed money.

The distinction between repairing or maintaining an asset and improving it is not always obvious. Renovating an older property to restore it, or repairs to prevent further deterioration, may be permitted. Adding an extension is generally not allowed where borrowed money is used. Improvements may be possible if they are funded with money that has not been borrowed, but they must not change the nature of the asset. If a property were destroyed, rebuilding a comparable property may be acceptable, while recreating an improved property may not be unless it is funded outside the borrowing, for example from insurance proceeds.

How Much Can An SMSF Borrow?

There is no fixed legal cap on the amount an SMSF can borrow under an LRBA. In practice, the loan to value ratio (LVR) set by the lender effectively limits how much you can borrow. The LVR is the size of the loan compared with the value of the property, so a larger deposit means a lower LVR and less risk for the lender.

Typical LVRs and deposits differ by property type:

• For residential property, the LVR is typically capped at around 70 to 80%, meaning a deposit of roughly 20 to 30% is required.
• For commercial property, the LVR cap is generally between 60 and 70%, requiring a deposit of around 30 to 40%.

SMSF loans tend to have terms of 15 to 30 years, and each loan can only be used to purchase a single acquirable asset. SMSF property purchases require a bare trust, also called a custodian trust, to hold the property on behalf of the SMSF, and all loan repayments must come from within the SMSF. You can read more about current SMSF lending policies for property investment.

Why SMSF Loans Cost More Than Standard Loans

SMSF loan interest rates are often 1 to 2% higher than conventional mortgage rates. Residential SMSF loan rates are generally lower than commercial SMSF loan rates. The added cost reflects the extra risk to the lender from the limited recourse structure and the additional complexity of the arrangement, including the bare trust.

Which Banks And Lenders Offer SMSF Loans In Australia?

Many of the major banks have stepped back from SMSF lending over the years, leaving the market mostly to second tier banks and non-bank lenders. The practical effect is fewer lenders and a wider spread of policies, so comparing options matters.

It helps to understand the difference between a bank and a non-bank lender. Banks are deposit taking institutions, while non-bank lenders fund their loans from other sources. Both can offer SMSF loans, and in each case it is the lender that sets the maximum LVR and the specific terms. Because the lender’s policies effectively determine how much your fund can borrow, the choice of lender has a real impact on your purchase.

SMSF Borrowing Rules And Compliance

Whether your SMSF is borrowing or lending, the same core compliance principles apply. The sole purpose test requires the fund’s investments to be maintained for the sole purpose of providing retirement benefits to members, or death benefits to their dependants. Fund assets must be kept separate from members’ personal assets. And transactions with related parties must be conducted at arm’s length.

An SMSF cannot acquire an asset from a related party unless the price reflects market value and the asset is a listed security, business real property, or a permitted in-house asset. If an asset is not acquired or sold at arm’s length, income from the transaction may be treated as non-arm’s length income and taxed at the highest marginal rate.

For related party loans under an LRBA, the ATO provides safe harbour terms in PCG 2016/5. These set out conditions, including interest rates and maximum LVRs, that the ATO will accept as consistent with arm’s length dealing. The safe harbour LVRs are a maximum of 70% for real property and 50% for stock exchange listed shares or units.

If an SMSF does not comply with the investment restrictions, the ATO may impose penalties, make the fund non-complying, disqualify the trustee, or prosecute trustees. A related party of an SMSF includes all members of the fund, associates of fund members, standard employer-sponsors, and associates of those sponsors.

Buying Residential Versus Commercial Property In An SMSF

SMSFs can purchase residential property solely for investment purposes. Trustees, members and their relatives cannot live in or rent the property. This is a strict line, and breaching it puts the fund’s compliance at risk.

Commercial property, known as business real property, is treated differently. An SMSF may purchase business real property and lease it to a business owned by an SMSF member, provided the lease is on market terms. This is one of the genuine advantages available to business owners using an SMSF.

Tax Treatment Of SMSF Property And Loans

The tax treatment of property held in an SMSF is one of the main attractions. Rental income is taxed at the concessional superannuation rate of 15% in the accumulation phase and may be tax-free in the pension phase. From 1 July 2026, Division 296 adds an extra 15% tax on the share of earnings attributable to a member’s total super balance above $3 million, and a further 10% above $10 million. Interest payments on SMSF loans are tax-deductible, reducing the taxable income of the fund.

On a sale, SMSFs pay a discounted capital gains tax rate of 10% on assets held for more than 12 months, with the potential for zero CGT if the asset is sold during the pension phase. Keep in mind the warning above: income from non-arm’s length dealings is taxed at the highest marginal rate, which can wipe out these concessions.

Risks And Common Mistakes With SMSF Loans

The benefits of borrowing within an SMSF come with real risks, and the consequences of a mistake can be costly. Common pitfalls include:

• Cash flow strain, because all loan repayments must come from within the fund.
• Concentration risk, where the fund’s wealth is tied up in a single large asset.
• Higher borrowing costs than a standard mortgage.
• Breaching the single acquirable asset rule by trying to fund multiple titles or assets under one loan.
• Breaching the improvement rule by using borrowed money to improve rather than repair or maintain the asset.
• Exceeding the 5% in-house asset cap, which can force disposal of the entire asset.
• Using loan features such as offset accounts that do not comply with the limited recourse structure, which can be a particular trap with some non-bank loans.

Because the rules are detailed and the penalties for getting them wrong are significant, it is worth obtaining tailored advice before entering into any SMSF borrowing or lending arrangement.

Speak To An SMSF Specialist

SMSF borrowing and lending sit inside some of the strictest rules in the super system. An SMSF can never lend to members or their relatives, can only lend to other related parties within the 5% in-house asset cap, and can generally only borrow through a limited recourse borrowing arrangement or under narrow short term exceptions. Get the documentation, interest rate, or asset structure wrong, and the fund can face non-arm’s length income taxed at the highest marginal rate, forced asset disposals, or trustee penalties.

If you are weighing up an SMSF property purchase, a related party loan, or simply want to be sure your fund is compliant, a short conversation with a specialist can save a great deal of cost and stress. We can review your investment strategy, trust deed, and proposed arrangement against the current rules and explain your options in plain language.

About The Author: Artur Osadchiy

Artur is a Certified Practising Accountant with over 30 years’ experience working as a trusted advisor to 600+ clients across Australia. Based in Melbourne, he started Tax Window with his wife Marina in 2009 and leads the firm’s tax and accounting team. In his free time, Artur enjoys watching the AFL (go Kangas!) and spending time with family.

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