Related Party LRBA - Safe Harbour SMSF Loan Interest Rate

A related party LRBA — sometimes called a member loan to SMSF or SMSF related party loan — is where a member, family member, or other related entity lends money to a self-managed super fund for the purchase of property or listed shares. Since 30 June 2016, strict rules have governed these arrangements. The ATO’s safe harbour guidelines (PCG 2016/5) set out the loan terms that must be met, including the interest rate (updated each financial year), maximum loan term, LVR, and repayment requirements.

Getting these terms wrong exposes the SMSF to Non-Arms Length Income (NALI) treatment — which taxes the affected income at 45% plus the 2% Medicare Levy instead of the normal 15% fund rate. The stakes are high.

Safe harbour conditions — at a glance

The following table sets out the full ATO safe harbour conditions under PCG 2016/5:

Safe harbour interest rates — by financial year

The safe harbour interest rate for real property is based on the Reserve Bank of Australia (RBA) Indicator Lending Rate for banks providing standard variable housing loans for investors (RBA Table F5). The rate is determined from the published May rate and applies from 1 July of the following financial year.

The applicable rate for listed securities is the same base rate plus 2 percentage points.

Source: ATO — Key superannuation rates and thresholds

Important: Interest must be calculated monthly on a compounding basis — not annually. If you are reviewing an existing related party loan agreement, check that the loan documentation and actual payments reflect this.

Why the safe harbour matters — NALI explained

An SMSF must deal with related parties on arm’s-length terms. When a related party LRBA does not meet the arm’s-length test, income earned from that arrangement becomes Non-Arms Length Income (NALI) under the SIS Act.

NALI is taxed at 47% (45% top marginal rate plus 2% Medicare Levy) rather than the standard 15% fund rate. This applies not just to rental income but also to the capital gain on eventual sale of the asset. The exposure can be enormous on a property that has grown significantly in value.

The safe harbour in PCG 2016/5 provides a clear, documented path to demonstrate arm’s-length treatment. If all the conditions are met, the ATO will not challenge the arrangement. If even one condition is not met — for example, the interest rate is even slightly below the published safe harbour rate — the NALI risk arises.

Are the safe harbour terms mandatory?

No. A related party LRBA can meet the arm’s-length test without strictly meeting every safe harbour condition — but the onus is on the trustees to demonstrate it. Two examples where this might apply:

• An existing bank LRBA is refinanced to a related party on identical terms to the original bank loan;
• An SMSF has a formal bank approval but obtains finance from a related party on the same terms as the bank offer.

In practice, the safe harbour is the simplest and safest approach for most related party LRBAs. Demonstrating arm’s-length treatment outside the safe harbour requires detailed, supportable documentation and carries more audit risk.

Who is a related party of an SMSF?

A related party for SMSF purposes includes:

• Members of the SMSF;
• Trustees and directors of the corporate trustee;
• Standard employer-sponsors;
• Relatives of members and their spouses;
• Partners in a partnership with members;
• Any Part 8 Associate of a member;
• Any company or trust controlled by members or their Part 8 Associates.

For more detail: Who is a related party of an SMSF?

Who should be the lender?

There is no restriction on who can act as the related party lender, but selecting the right entity matters for tax efficiency.

The most common scenario is a member (or members) of the SMSF lending from personal savings or by drawing on existing loan facilities — for example, a redraw or equity release from their home. The interest spread between the member’s personal borrowing rate and the safe harbour rate can create a net cost, so this should be modelled carefully before proceeding.

Key considerations when selecting a lender:

• Taxable income: The interest received by the lender is taxable income. Where possible, nominate the related party with the lower marginal tax rate.
• Concessional contributions strategy: Additional interest income can be offset by making extra concessional contributions into the SMSF — deductible at the member’s marginal rate (up to 47%), taxed at 15% inside the fund. The concessional cap is $30,000 per year (2024–25 and 2025–26); carry-forward provisions may allow more. Seek advice specific to your situation.
• Division 7A: Where the lender is a private company controlled by members, Division 7A of the Income Tax Assessment Act applies and adds complexity. Specific advice is essential.
• Family trusts: Family trusts can be lenders, but the trust distribution consequences and related-party definitions need careful review.

Other eligible related party lenders include family members of SMSF members, another SMSF linked to the members, and companies or trusts controlled by the members.

LRBA ban update — what it means for related party loans

Legislation passed both houses of Parliament on 25 June 2026 and bans new residential property LRBAs from 10 August 2026. Key points for related party loan holders:

• Existing residential LRBAs are fully grandfathered — whether the lender is a bank or related party. There is no need to restructure or wind up an existing related party LRBA.
• Refinancing is explicitly permitted — you can refinance a residential related party LRBA (bank to related party, or related party to bank) after commencement without triggering the ban.
• Commercial property LRBAs are completely unaffected — related party loans for business real property (as defined under s.66 SIS Act) remain available after commencement.
• New residential LRBAs require contracts before commencement — if you are considering a new residential related party LRBA, the contract must be exchanged before the commencement date (expected ~12–16 August 2026).

Read our full LRBA ban analysis →

How Grow can help

Grow SMSF can assist with:

• Setting up an SMSF where you have decided this is a suitable strategy;
• Referring you to a licensed financial adviser for advice on SMSF suitability, insurance, and super strategy;
• Setting up a bare trust for a related party LRBA (commercial property or existing residential arrangements);
• Preparing related party SMSF loan agreements that comply with PCG 2016/5 safe harbour terms;
• Preparing a loan amortisation schedule to determine the monthly principal and interest repayments;
• Arranging registration of a mortgage against the property title;
• Tax guidance on the implications of using a specific related party lender.

A related party LRBA can be a powerful and tax-efficient strategy when structured correctly. The consequences of getting it wrong are severe. Always seek advice from an experienced SMSF specialist and contact us if you have questions.

Related party LRBA — frequently asked questions

What is the ATO safe harbour interest rate for 2026–27?

The safe harbour rate for 2026–27 is 9.35% for real property (residential and commercial) and 11.35% for listed securities. This is an increase from 8.95% and 10.95% respectively in 2025–26, reflecting movements in the RBA’s indicator lending rate for standard variable housing investor loans.

What happens if I use the wrong interest rate on a related party LRBA?

If the interest rate is below the safe harbour rate — even by a small amount — the income earned by the SMSF from that arrangement may be classified as Non-Arms Length Income (NALI) and taxed at 47% (45% + 2% Medicare Levy) rather than 15%. This applies to both annual rental income and the capital gain on eventual sale. Getting the rate right each year is critical.

Does the interest rate need to be updated each year?

Yes, if the loan is on a variable rate. The applicable safe harbour rate must be used for each financial year of the LRBA. Alternatively, trustees can choose to fix the interest rate at commencement for a maximum period of 5 years (real property) or 3 years (listed securities), after which it reverts to variable.

Can I lend money to my own SMSF?

Yes. A member of an SMSF can lend money to the fund for the purpose of an LRBA, provided the loan complies with the ATO’s safe harbour terms under PCG 2016/5. The loan must be documented with a formal written agreement, carry the correct interest rate, and be repaid monthly on a principal and interest basis.

What is the maximum loan term for a related party LRBA?

For real property, the maximum loan term is 15 years. For listed securities, it is 7 years. If the loan is refinanced — for example, from one related party to another — the remaining term is reduced by the duration of any previous loans on the same asset.

What is the maximum LVR for a related party LRBA?

For real property, the maximum loan-to-value ratio is 70%, based on the market value of the property at the time the loan is entered into or refinanced. For listed securities, the maximum is 50%.

Is interest-only permitted under the safe harbour?

No. The safe harbour requires monthly principal and interest repayments. Interest-only loans do not qualify for safe harbour treatment. Interest must also be calculated on a monthly compounding basis, not on a simple annual basis.

Can I refinance a related party LRBA?

Yes. An existing related party LRBA can be refinanced — including from a bank to a related party, or from one related party to another. The refinanced loan must still comply with all safe harbour conditions, and the remaining loan term cannot exceed the original maximum minus the time already elapsed.

Does the LRBA ban affect related party loans on residential property?

Existing residential LRBAs — whether from a bank or related party — are fully grandfathered and can continue unchanged. Refinancing is also permitted. The ban only prevents new residential LRBAs where contracts are exchanged after the commencement date (expected ~10 August 2026). Related party LRBAs for commercial property are not affected at all.

Can an SMSF lend money to a member?

No. An SMSF cannot lend money to members or their relatives. Section 65 of the SIS Act prohibits superannuation funds from providing financial assistance to members or their relatives. This is distinct from a member lending to the SMSF, which is permitted under an LRBA.

What is NALI and how does it relate to SMSF related party loans?

NALI stands for Non-Arms Length Income. When an SMSF receives income (including rent or capital gains) from an arrangement that is not on arm’s-length terms — such as a related party loan at below-market interest rates — that income is classified as NALI and taxed at 47% rather than the standard 15%. The safe harbour in PCG 2016/5 exists specifically to protect related party LRBAs from NALI treatment.