Can A Self-Managed Super Fund (SMSF) Lend Money?

  • Sonny RahimSonny Rahim
  • Updated Jul 31, 2023

  • Mate Checked

    This information has been reviewed by our SMSF Mates before it was published as part of our review process.

Yes, an SMSF can lend money to a third party. However, some strict rules and regulations must be followed in order for the loan to be compliant with superannuation law.

The most important rule is that the loan must be made on commercial terms. This means that the interest rate charged must be at or above the market rate, and the loan must be secured by an acceptable asset (such as property).

Another key rule is that the SMSF trustee must believe that the loan will improve the financial position of the fund. This means that the trustee cannot simply lend money to a friend or family member without a good reason, and lending money must be a part of the SMSFs investment strategy.

If you’re considering lending money from your SMSF, it’s essential that you seek professional advice to ensure that you are complying with all the relevant rules and regulations. In this article, we will look at the key parts of an SMSF lending money to a third party.

Can SMSFs lend money to third parties?

An SMSF can lend money to a third party in a number of ways:

  1. Through limited recourse borrowing arrangements (LRBA);
  2. As a collateralised loan; or
  3. As a non-collateralised loan.

Each of these options has different risks and benefits that need to be considered before entering into any loan agreement.

Limited recourse borrowing is the most common type of lending arrangement between an SMSF and a third party. Under this arrangement, the trustee of the SMSF borrows money from a financial institution to purchase an asset for the fund, with the asset being held as security for the loan. The key advantage of limited recourse borrowing is that it limits the fund’s exposure to the risks associated with the asset, as the fund is only liable for the loan to the extent of the asset’s value.

A collateralised loan is another option for an SMSF to lend money to a third party. In this type of arrangement, the borrower pledges an asset as security for the loan. This means that if the borrower defaults on the loan, the lender can seize and sell the asset to recoup their losses. The main advantage of a collateralised loan is that it offers greater security for the lender. However, it also exposes the SMSF to greater risk, as it could lose its asset if the borrower fails to repay the loan.

Finally, a non-collateralised loan is one where no asset is pledged as security for the loan. This type of arrangement is riskier for the lender, as they have no asset to fall back on if the borrower defaults. However, it can be advantageous for the SMSF, as it allows them to invest in assets that may not be suitable collateral for a loan (such as residential property or commercial property).

SMSF Lending Rules: How Does It Work?

The SMSF rules on lending money are quite clear: an SMSF can lend money to a third party, but several conditions must be met.

First, the loan must be on commercial terms. This means that the interest rate must be at least as high as the market rate, and the loan must be secured by an appropriate asset.

Second, the loan must be for a genuine business purpose. The Australian Tax Office has stated that loans for private or personal purposes will not be allowed.

Third, the SMSF trustees must ensure that they do not become personally liable for the debts of the borrower. This means that the loan agreement must be carefully drafted to protect the SMSF’s interests.

Finally, the SMSF must keep accurate records of the loan, including the interest rate charged and the collateral provided. The fund’s investment strategy should also allow for lending money and must adequately reflect this.

If you are thinking of lending money to a third party through your SMSF, it is important to seek professional advice to ensure that you meet all of the requirements.

SMSF Loans to Related Parties

The legality of who an SMSF can loan money to is governed by the in-house asset rules. An SMSF can only loan money to certain related parties and only under specific conditions.

The in-house asset rules state that an SMSF can only invest up to 5% of its total assets in loans to related parties. This includes loans to members, trustees, directors of corporate trustees, and relatives of members or relatives of trustees.

There are also restrictions on the types of loans that can be made to related parties. For example, an SMSF cannot lend money to purchase a property from a related party.

If an SMSF does loan money to a related party, it must ensure that the loan is on commercial terms. This means that the interest rate charged must be at least equal to the market rate for similar loans, and the loan must be secured by an asset of the related party with a value at least equal to the amount of the loan.

The in-house asset rules are designed to protect SMSF assets from being used for the benefit of related parties rather than for the benefit of the SMSF as a whole. By complying with these rules, SMSFs can avoid running into problems with the ATO.

Can A SMSF Lend Money to Members?

The answer is no, your SMSF cannot lend money or provide financial assistance to you or your business.

There are a few reasons for this. Firstly, it would be considered a conflict of interest for the trustee(s) of the SMSF to loan money to a member or their associated entity. This is because the trustee(s) would be acting in their capacity as trustees of the SMSF and not as individuals.

Secondly, loaning money to members or their associated entities would contravene the sole purpose test under superannuation law. The sole purpose test requires that an SMSF’s activities must be undertaken to provide retirement benefits to members or their dependents in the event of death.

Finally, loaning money or providing financial assistance to members or their associated entities would put the SMSF at risk of breaching the diversification requirements under superannuation law. These requirements state that an SMSF must not invest more than 5% of its assets in a single asset or 20% of its assets in a single asset class.

If you’re looking to borrow money for your personal or business purposes, there are a number of options available to you. You could approach a bank or other financial institution for a loan or look into borrowing against your home equity.

Can a SMSF Get a Loan?

Yes, your SMSF can apply for a loan from a bank or other financial institution. However, there are a few things to keep in mind before taking out a loan as an SMSF.

First, you’ll need to make sure that the loan purpose is for a valid SMSF investment strategy. This means that the loan must be used to purchase assets that will generate income or grow in value over time. Additionally, the loan must be repaid within a reasonable period of time, typically no more than ten years.

Second, you’ll need to ensure that you have enough funds available to make the repayments on time and in full. This includes both the principal and interest payments. If you miss any payments, your SMSF could be at risk of default and may have to sell off assets to repay the loan.

Third, you’ll need to ensure that the loan’s interest rate is reasonable. Many loans have higher interest rates than traditional ones, so comparing rates is important before taking out a loan.

Fourth, you’ll need to ensure that the loan terms are favourable. This includes things like the repayment schedule, early repayment penalties, and other fees.

Finally, you should always speak with a financial advisor before taking out an SMSF loan to make sure that it’s the right decision for your SMSF.

How Much Will Banks Lend to SMSFs?

The amount that banks are willing to lend to SMSFs varies depending on the financial institution, but typically the maximum loan amount is capped at around 80% of the property’s value. This means that borrowers will need to have at least a 20% deposit saved before they can apply for a loan.

For properties worth more than $1 million, some lenders may only be willing to finance up to 70% of the value, so borrowers in this situation would need to have a 30% deposit.

It’s also important to note that banks will usually only lend up to a certain dollar amount – typically between $500,000 and $2 million – regardless of the value of the property. So if you’re looking to purchase a residential property worth more than $2 million, you would need to have the remaining funds available as a deposit.

When it comes to SMSF loans, banks will often require borrowers to have a higher credit score than they would for a standard home loan. This is because SMSF loans are seen as higher risk by lenders. So if you’re considering applying for an SMSF loan, it’s important to ensure your credit file is in good shape before starting the application process.

If you’re unsure how much you can borrow, most banks and lenders offer online calculators that can estimate how much they may be willing to lend you. Alternatively, you can speak to a mortgage broker who can help assess your borrowing power and find a loan that suits your needs.

Which Banks Will Lend to SMSFs?

Only smaller banks and credit unions will loan money to SMSFs, as the big four banks in Australia stopped the practice of lending to SMSFs in 2018. Not all banks offer the same terms and conditions. Speaking to a financial advisor to determine which bank is best for your SMSF is important. Some of the things you should consider when choosing a bank for your SMSF loan include:

  • The interest rate
  • The loan term
  • The repayment options
  • Any fees or charges associated with the loan agreement

By speaking to a financial advisor about an SMSF loan, they will be able to help you compare different banks and find the best loan for your SMSF.

General Advice Warning

Sonny Rahim

Premia Private

Sonny Rahim is a finance professional based out of the Greater Perth Area. He is the director and founder of Premia Private, a multi-faceted finance business with advisory divisions and expertise in the areas of Strategic Planning, Wealth Management, Investment Management, Debt and Personal Insurances. Sonny is one of the founders of SMSF Mate.

Sonny studied in the Private Markets Investment Programme at Saïd Business School, University of Oxford and also participated in the Oxford Entrepreneurship Venture Finance. He also completed a Bachelor’s Degree, Commerce (Accounting and Finance) at Curtin University in Western Australia.

As well as being a founder and managing director of the Premia Financial Group, Sonny has worked as an investment fund manager and a chartered accountant. He sits on the board of Ronald McDonald House Charities Western Australia.

You can find out more about Sonny or connect with him on Linkedin here:

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  • SMSF Mate is a unique website because it has ideas about how to approach SMSFs, insurance and other financial topics that come straight from first hand experience. It's much more useful than what you find on all the other financial websites that just offer generic info that you could easily get on the ATO's website. It's also nice to know there's no financial incentive behind the information, it's legitimately there to help people understand self-managed super funds and how to get the most out of them, not to get an affiliate commission from a broker or other financial services provider. The investment product information is also incredibly useful, I've never seen this kind of functionality on any other website that let's you look at such a wide range of products, sort by what info is most interesting or important to you, and subscribe to updates for different funds and financial products all in one place. Definitely worth checking out if you own or are considering an SMSF!

    David G, Self-Employed, SMSF Owner
  • SMSF Mate provides a unique insight into superannuation and financial topics in a way that is easier to understand than conventional websites. The colloquial nature of the site makes it easy to understand and they often speak about complicated topics in lamens terms so I can wrap my head around them. The investment product information is a great way to research funds that I am interested in investing in with my SMSF and there is a lot of helpful information on the site for better structuring my investment portfolio. In comparison to other websites which offer similar information, SMSF Mate excels as the information is free to access whereas many other sites charge a subscription fee for the same thing. Overall, I think SMSF Mate is a great resource for SMSF trustees and is worth looking at for a variety of super-related topics. Thanks.

    Tim B, Business Owner, SMSF Trustee