Related Party Loans and SMSF Property Borrowing

A related party loan occurs when an SMSF borrows from a member or an associate of a member. These arrangements are one way SMSFs can fund property or other investments.

SMSF Related Party Loans

While related party loans can sometimes be more cost-effective than borrowing from banks, they involve specific legal and regulatory requirements that trustees must follow.

Typically, related party loans are held in a bare trust or custodian trust, with the SMSF as the beneficial owner. Unlike borrowing from banks, these arrangements do not usually require a corporate trustee, which can reduce administrative complexity. However, proper documentation, loan schedules, and adherence to commercial and arm’s-length terms are essential to meet regulatory obligations.

Related party loans must be structured on an arm’s-length basis, meaning the terms of the loan, including interest rates, should reflect what would be offered between unrelated parties. This helps ensure the SMSF remains compliant with superannuation laws.

The Australian Taxation Office (ATO) publishes guidance, such as safe harbour interest rates for LRBAs, which trustees may refer to when assessing the appropriateness of a loan.

Trustees should also be aware of restrictions around property acquisition. For example, SMSFs cannot purchase residential property from related parties. Returns from the investment, such as rental income or capital gains, must flow directly into the SMSF to support retirement savings.

SMSF Mortgage brokers can explain the mechanics of SMSF loans, the differences between bank and related party funding, and the general risks of non-compliance, supported by other professionals who can fill in the gaps. Trustees should always consult qualified legal and accounting professionals before entering into these arrangements.

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(GENERAL INFORMATION ONLY)

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