SMSF borrowing rules - ATO provides further guidance

ATO has provided further clarification and guidance on SMSF limited recourse loans through some new interpretive decision relating to SMSF borrowing rules.

Article out of date. Please refer to our blog for for recent articles on this topic.

Other useful articles related to SMSF borrowing rules:

This article will be a change of pace for me – as I normally don’t like to get too technical when discussing strategies you can do to build your wealth using superannuation.

However due to the fact that many readers are suspicious of the ATO’s intention when it comes to the rules around a SMSFs ability to borrow to invest in property, I believe it is essential for me to provide an update of some recently released ATO interpretive decisions (which I will call ‘rulings’ for simplicity) which impact – positively – on this strategy.

Ruling 1 – Borrowing on terms favourable to the SMSF

ATO ID 2010/162

This ruling confirms that a SMSF can borrow from a related party (such as the members or a company or family trust controlled by the members) and pay an interest rate that is lower than the typical interest rate charged from an unrelated lender – such as a bank.

On the surface, this might seem like a great method to enable people who want to get more money into their SMSF and keep it in there, however caution needs to be taken to ensure that the difference between the actual interest charged to a SMSF from a related party borrower and the arms length (market rate) interest is not considered a contribution.

My opinion is that this ruling covers a very narrow scope – so in general any related party borrowings (loans from members) should always be conducted at arms length and on commercial terms.

Ruling 2  -Refinancing

ATO ID 2010/169

This ruling confirms that a SMSF that uses a limited recourse loan can refinance that loan on the provision that the new loan doesn’t increase the level of borrowings against the property held by the custodian trust.

This gives SMSF trustees great flexibility to periodically review their borrowing options and refinance to a more attractive borrowing facility in the future.

One warning on refinancing however: Up to the 7th of July 2010 SMSFs had more flexibility in regards to what they could and couldn’t do with a property purchased using an instalment warrant arrangement (now call limited recourse borrowings due to changes to the SIS Act).  If a SMSF refinances a pre 7th July 2010 instalment warrant arrangement it will then come under the new limited recourse borrowing rules – which are more restrictive.

Ruling 3 – Third party guarantees

ATO ID 2010/170

In most instances lenders will require the members of a SMSF obtaining a limited recourse loan to sign personal guarantees.

This ruling simply confirms that such guarantees are acceptable and that the members can indemnify themselves only against the asset being purchased under the arrangement.

The best way to avoid getting into trouble in relation to guarantees is to select your property carefully, only utilise a conservative level of borrowings and ensure the property being acquired will be cash flow positive.

Ruling 4 – Joint investors

ATO ID 2010/172

This ruling confirms that two SMSFs cannot borrowing using a joint limited recourse loan to purchase one property where that single title is held by the trustee of one custodian trust.  The reason being that such arrangement doesn’t enable either of the SMSFs to acquire the sole interest in the property after making one or more repayments – which is one of the key factors that needs to be satisfied under the requirements of the SIS Act.

If two SMSFs do wish to combine their resources to purchase a single property, there are other options they can utilise to do it.

Please check out my other article:

6 ways to purchase property using your super for further information on these strategies.

Ruling 5 – Capitalisation of interest

ATO ID 2010/184

This ruling confirms that interest on a limited recourse loan – whether from a bank lender or a related party lender – can be capitalised provided all the other conditions that permit a SMSF to borrow to acquire an asset such as property are met.

This ruling gives SMSF trustees some flexibility in regards to the interest repayments on a limited recourse loan, however in the case of bank loans SMSF trustees would need to ensure they don’t breach the borrowing agreement by exceeding the bank specified loan-to-value ratio.

In most cases the ability to capitalise interest will probably not be used by SMSF trustees however confirmation that they do have the flexibility to do so is a positive.

Ruling 6 – Charge

ATO ID 2010/185

This ruling confirms that a secondary ‘charge’ over the title of the property held by the custodian trust in addition to the mortgage registered on the same title by the bank providing the limited recourse loan will make the SMSF breach the borrowing rules.

This does not prevent the SMSF trustees obtaining two loans to acquire a property under limited recourse borrowing arrangement – i.e. one from the bank and another from a member – it simply means the second loan cannot be secured against the title of the property.

Implications (the following is unrelated to the above ATO updates):

Although a little off topic for this post, the strategy of using two loans – one from a bank lender (secured / mortgage registered on the title) and another loan from the SMSF members (unsecured / no mortgage or charge registered on the title) to acquire a property under a limited recourse borrowing arrangement is a great strategy for younger investors who are afraid of tying up all their monies in super and not being able to access them until they retire.

The secondary loan from the members can be repaid with interest (interest cannot be higher than the market value / arms length percentage) back to the members.  The capital and interest repayments can be funded by either excess monies generated from a cash flow positive property, the proceeds from the sale of the property or even employer superannuation contributions such as SGC and salary sacrifice.

In summary this strategy enables the members of the SMSF to put extra monies in when the property is purchased, allow the property to grow and generate income in an extremely tax effective environment, and draw it back when the SMSF builds up some additional cash – meaning those monies leant are not trapped in super until the members retire.

A word of warning though – this is an advanced strategy and a lot of things can go wrong.  Do not try this at home.

If you believe this strategy may be advantageous for your situation, seek competent and appropriately qualified professional advice.


These interpretative decisions released by the ATO are very positive.

Not only do they answer some of the common and not so common questions SMSF trustees and their advisers have asked, they indicate the SMSF borrowing rules will be around for a few years yet – and hopefully here to stay.

Regardless of what you can and can’t do with your superannuation monies under the limited recourse borrowing arrangements, it is key to remember that the quality of your chosen investments will ultimately determine how successful you are in using your superannuation to build your wealth.

If you have any questions or comments please feel free to post them in the comment box below.


  • Jin

    April 19, 2011 at 9:43 am

    Could I please know how can we legally get the SMSF borrow money from a related party?

    • Kris_Evolved

      April 20, 2011 at 7:15 am

      Hi Jin

      You need to be very careful borrowing from a related party. You need to ensure that everything is conducted on an arms-length basis and correct documentation such as loan agreements prepared by a lawyer and a mortgage registered if property is being used.

      Of course all the same rules that relate to limited-recourse borrowings using the bank as the lender apply to loans from a related party lender.

      I have an ebook which contains strategies and example of how related party borrowings can be used. If you would like a free copy please contact me.


  • Andrew

    January 9, 2012 at 12:56 pm

    Where a property is acquired using funds borrowed from a member – does the loan have to be registered as a charge on the title?

    • Kris_Evolved

      January 9, 2012 at 5:21 pm

      Hi Andrew,

      That is a good question.

      Generally yes – where the only loan is from a member or other related party, that related party as the mortgagor should register a mortgage against the title the same as a bank lender would to ensure everything is conducted at arms length.

      Probably the only time I wouldn’t do this would be when there are BOTH bank and member loans, or if the member loan was expected to be in place for a short period of time (i.e. less than 2-3 years).

  • Ray Chuhaj

    November 9, 2015 at 2:24 pm

    Hi is it possible for a smsf to buy a property with a 50% deposit and the remaing being vendor financed (by seller) for 2 yrs until its refinanced by lending institution?

Comments are closed.

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