SMSF Lending: 9 Powerful Strategies

Used well, SMSF lending can help trustees acquire quality assets while protecting the rest of the fund. Used poorly, it can trigger non‑arm’s length income, in‑house asset breaches, or borrowing contraventions that risk penalties and non‑compliance. This guide lays out nine practical strategies so you can structure SMSF lending decisions with confidence, backed by official guidance.

SMSF lending typically happens under a limited recourse borrowing arrangement. The ATO explains what an LRBA is, how the asset must be held in a separate holding trust, and why recourse must be limited to the acquired asset only. Review the ATO’s overview of limited recourse borrowing arrangements for the core rules and definitions.

Moneysmart also sets out the big picture for property and SMSFs, including the costs, rules, and risks when borrowing to buy real property. See SMSFs and property for an accessible summary before you commit.

1) Start with the LRBA rulebook before you negotiate a loan

A compliant LRBA must use borrowed money to acquire a single acquirable asset, or a collection of identical assets with the same market value, and the borrowed funds cannot be used to improve the asset. The asset must sit in a holding trust, with the SMSF holding beneficial ownership and the right to take legal title after repayments. Any charge must be limited to that asset. Read the ATO’s step‑by‑step rules for arrangements entered from 7 July 2010. See Rules for entering an LRBA.

The ATO’s detailed ruling clarifies what is an acquirable asset, what counts as a repair versus an improvement, and when changes create a replacement asset. See SMSFR 2012/1.

2) Build a clean structure that the auditor can test

Your SMSF lending structure should be simple and documented. Use a holding trust that clearly gives your SMSF the beneficial interest and the right to acquire legal title. Complex trusts like discretionary trusts will not satisfy the requirement to have an interest in a specific asset of the holding trust. The ATO’s “About LRBAs” page explains holding trust requirements and warns against complex structures. See About LRBAs.

If your LRBA uses a related‑party lender, keep a written loan agreement with objective support for interest rates and terms. The ATO’s “Relationships with the LRBA lender” page explains documentation expectations and how related‑party loans must match arm’s length outcomes. See Relationships with the LRBA lender.

3) Price your related‑party loan to arm’s length using ATO safe harbours

If SMSF lending is through a related party, consider the ATO’s practical safe harbours in PCG 2016/5 to reduce NALI risk. The guideline sets out acceptable terms for real property and listed shares, including interest type, rate, LVR, fixed and variable periods, and security. Using those parameters provides the ATO’s administrative assurance that your terms are arm’s length for income tax purposes.

The ATO also publishes indicative safe harbour rates by year. For example, for 2025–26 the safe harbour interest rate is 8.95% for real property and 10.95% for listed shares. Confirm the current table under “SMSF LRBA interest rates.” See Other super rates and thresholds.

4) Manage NALI risk beyond interest rates

NALI can arise if any LRBA term or expenditure is non‑arm’s length, not just the interest rate. LCR 2021/2 explains how non‑arm’s length expenditure can taint the income from the asset, including where the loan is on non‑commercial terms or services are provided to the fund at nil or discounted rates outside of trustee capacity. The ATO’s ruling gives real‑world LRBA examples.

The ATO also clarifies how NALI interacts with capital gains on disposal, including worked examples where the acquisition price or financing terms were not arm’s length.

5) Choose assets that fit permissible acquisition and use rules

If your SMSF lending funds the purchase of property, ensure it is an acquirable asset the fund can lawfully obtain. The ATO outlines which related‑party acquisitions are permitted, such as business real property at market value, and confirms that existing SMSF assets cannot be “swapped” into an LRBA or improved using borrowed money. See Rules on assets under LRBA.

Moneysmart adds consumer‑focused warnings on property, including the increased costs of SMSF loans, the sole purpose test, and the prohibition on members living in or renting residential SMSF property to related parties. See SMSFs and property.

6) Keep in-house asset risks off the table

The holding trust in an LRBA is a related trust, which raises in‑house asset issues unless an exception applies. The exception covers the SMSF’s interest in the holding trust while the borrowing is in place, provided the holding trust holds only the acquirable asset and that asset would not be an in‑house asset if owned directly by the SMSF. Leases to related parties are permissible only where the asset would be allowed if held directly, such as business real property on market terms. See In‑house asset rules for LRBAs.

Beyond LRBAs, remember the general investment restrictions: do not lend to, or provide financial assistance to, members or relatives, and do not breach the in‑house asset cap. The ATO summarises the core prohibitions and the consequences for trustees. See What are the SMSF investment restrictions?.

7) Model liquidity, buffers and cash flow before you sign

SMSF lending requires enough liquid assets to cover interest, principal, and property costs without forcing distress sales. The ATO’s “About LRBAs” checklist asks you to consider rate rises, early call risk, fees, insurance, and maintenance before you enter the arrangement. See About LRBAs.

Moneysmart highlights that SMSF property loans usually cost more than personal property loans and that fees reduce retirement savings. Use this to stress‑test rental shortfalls or share market volatility if your LRBA is over listed assets. See SMSFs and property.

8) Use the safe harbour rates as a living benchmark

Even when you borrow from a bank, the ATO’s safe harbour schedule is a useful yardstick to evidence arm’s length pricing year by year. If you are using a related‑party facility, review loan terms annually so they remain consistent with safe harbours, including fixed‑rate resets, LVR thresholds, interest type, and security over the single acquirable asset. See Other super rates and thresholds and PCG 2016/5.

If you choose not to use the safe harbour settings, keep objective support for each term and be ready to defend the arrangement as arm’s length. The ATO’s PCG makes clear that not meeting safe harbours does not automatically mean NALI, but it removes administrative certainty.

9) Align SMSF lending with retirement strategy, not just the purchase

Think beyond settlement. If you plan to convert to retirement phase, remember NALI consequences carry into pension earnings, and any non‑commercial LRBA terms may contaminate otherwise tax‑free pension income. The ATO’s LCR 2021/2 outlines how general and specific non‑arm’s length expenses interact with fund income and gives LRBA examples.

For members nearing Age Pension age, remember that super in accumulation is generally ignored before Age Pension age, but is tested under assets and deeming once you reach Age Pension age. If you plan to start a pension from an LRBA asset, check how your income stream is assessed. See Services Australia pages on Superannuation and the Age Pension and on Income streams.

A practical SMSF lending playbook

Define the investment case.
Write down how SMSF lending supports your investment strategy, risk profile, diversification, liquidity, and retirement objectives. The ATO expects this discipline before you borrow. See About LRBAs.

Document the structure.
Put in place a compliant trust deed, LRBA deed, and a bare trust deed that clearly names the SMSF as beneficiary and gives the right to acquire legal title on repayment. The asset must be the single acquirable asset to meet the LRBA rules. See Rules for entering an LRBA.

Select an arm’s length funding source.
If using a related‑party lender, adopt PCG 2016/5 safe harbours or maintain evidence that your terms align to commercial benchmarks. See PCG 2016/5 and the current safe harbour rates. See Other super rates and thresholds.

Test acquisition and usage rules.
Confirm whether the asset can be acquired from a related party and how it can be used or leased. For example, business real property can be leased to a related party at market rent under strict conditions. See Rules on assets under LRBA.

Budget for costs and buffers.
Incorporate higher SMSF loan margins, legal and set‑up fees, and property outgoings. Moneysmart lists common fees and warns that they reduce your retirement savings. See SMSFs and property.

Monitor NALI exposure.
Audit interest, LVR, fees, security, and any embedded discounts or services provided to the fund. The NALI framework applies to both specific and general non‑arm’s length expenses. See LCR 2021/2 and TD 2024/5.

Respect in‑house asset limits.
Check the LRBA holding trust exception and ensure the holding trust only holds the acquirable asset. If the property is leased to a related party, confirm that an exception applies, such as business real property. See In‑house asset rules for LRBAs.

Plan the exit.
Decide whether to refinance, repay and take legal title, or sell. If selling, revisit NALI and CGT implications given the LRBA’s history and terms. See TD 2024/5.

Keep trustee education current.
SMSF rules evolve. Use the ATO’s SMSF area for updates, and Moneysmart for consumer‑level reminders on risks and duties. See Limited recourse borrowing arrangements and Self‑managed super fund (SMSF).

Internal resources for implementation

If you want help setting up or running an LRBA within your fund, these resources can save time and reduce risk:
SMSF Setup
SMSF Management
SMSF Tax Returns
Our Services

FAQs

What is SMSF lending and how does it usually work?
SMSF lending commonly uses a limited recourse borrowing arrangement to buy a single acquirable asset held in a separate holding trust. Recourse is limited to the acquired asset, protecting the rest of the fund. See the ATO’s LRBA overview.

Can my SMSF borrow from a related‑party lender?
Yes, but terms must be consistent with arm’s length outcomes. Use PCG 2016/5 safe harbours or show objective evidence for all terms, including interest, LVR, and security. See PCG 2016/5 and the ATO’s related‑party guidance.

How do I know my interest rate is acceptable?
The ATO publishes safe harbour interest rates each year for real property and listed shares. Using those rates with PCG 2016/5 terms provides administrative assurance. See “Other super rates and thresholds” and PCG 2016/5.

What is the biggest NALI risk in SMSF lending?
Non‑commercial financing or other non‑arm’s length expenditure linked to the asset can make its income non‑arm’s length income taxed at the top rate. LCR 2021/2 includes LRBA examples, and TD 2024/5 covers CGT interactions.

Can I borrow to improve an existing SMSF asset?
No. LRBA funds can acquire an asset, pay certain acquisition and maintenance costs, but cannot be used to improve an existing SMSF asset. See the ATO’s LRBA rules page.

How do in‑house asset rules affect the holding trust?
There is a specific exception so the SMSF’s interest in the holding trust is not an in‑house asset while the borrowing is in place, subject to strict conditions. See in‑house asset rules for LRBAs.

Is residential property allowed with SMSF lending?
Yes if the investment meets SMSF laws, but members and relatives cannot live in or rent the residential property. Moneysmart outlines the property rules and cautions.

What if my loan terms drift away from safe harbours?
You can either adjust terms back to safe harbours, refinance with a commercial lender, or maintain robust evidence that your terms remain arm’s length. PCG 2016/5 explains these options.

What are the short‑term borrowing exceptions outside LRBAs?
Only narrow exceptions exist, such as up to 90 days to meet benefit payments or surcharge liabilities, and 7 days to settle a security transaction, all capped at 10% of fund assets. See SMSF borrowing restrictions.