Related Party LRBA - Safe Harbour SMSF Loan Interest Rate

A related party LRBA is where a member of a self-managed super fund loans money to the SMSF for the purchase of property or listed shares. Since 30 June 2016, there have been strict rules in place around related party limited recourse borrowing arrangements.  The ATO has put in place safe harbour guidelines that outline the loan terms that must be used including the interest rate (updated each year) as well as the loan term, loan to value ratio (LVR) and other conditions.

What are the related party LRBA safe harbour conditions?

The following table outlines the ATO safe harbour conditions for a related party LRBA:

Real property (Commercial and Residential)Listed securities
Interest rateRBA Indicator Rates for banks providing standard variable housing loans for investors (8.85% for the 2023-24 financial year)

Interest rates can be fixed for a maximum of 5 years.

Refer to the ATO for the most up-to-date annual interest rates.

Same as real property + 2% (10.85% for the 2023-24 financial year)
Loan term
15 years for the original loan

(any refinancing will be reduced by the duration of the previous loan(s))

7 years for the original loan

(any refinancing will be reduced by the duration of the previous loan(s))

Maximum LVR70%

Market value is when the loan is entered into or re-financed.

SecurityA registered mortgageA registered charge/mortgage or similar security (that provides security for loans for such assets)
Personal guaranteeNot requiredNot required
Nature and frequency of repaymentsMonthly repayments on a ‘principal and interest’ basisSame as real property
Loan agreementsWritten and executedWritten and executed

The above conditions must be met for the SMSF to meet the ATO’s requirements related party limited recourse borrowing arrangements outlined in Practical Compliance Guidelines (PCG) 2016/5

In regards to the term of the loan, the maximum period (length of loan) for an SMSF related party LRBA is 15 years.  If a refinancing occurs the term of the loan cannot be extended.


What SMSF related party loan interest rate should be used?

For an SMSF related party LRBA to meet the ATOs safe harbour guidelines, the applicable interest rate must be used.

At the time of the last updating of this article, the applicable related party loan interest rate is 8.85% for residential or commercial property and 10.85% for listed shares and units. Interest is to be calculated monthly on a compounding basis. You can check the latest published interest rates via the ATO website here: Self-managed super fund limited recourse borrowing arrangements interest rates

Financial yearReal property
Listed securities

These rates are based on the Reserve Bank of Australia (RBA) Indicator Lending Rates for banks providing standard variable housing loans for investors (refer to table F5) – this rate is determined for the following financial year (from 1 July) based on the published rate in June each year.

The updated SMSF related party LRBA safe harbour interest rates can be located on the ATOs website here: Self-managed superfund limited recourse borrowing arrangements interest rates


Why is the safe harbour needed?

An SMSF must comply with the arms-length provisions when dealing with related parties.  This means the terms and conditions of a loan obtained from a related party of an SMSF cannot be provide any advantage to either party.  This means the net income to the SMSF cannot be increased by having a low interest or zero interest loan from a related party.  Similarly, the related party lender cannot gain an unfair advantage by having the SMSF pay above market interest rates on a loan.

Any related party LRBA must be at arms-length.  When an SMSF enters a limited recourse borrowing arrangement that is NOT at arms-length, any income received under that arrangement becomes non-arms length income or NALI.  Non-arms length income of an SMSF is taxed at the highest marginal tax rate of 45% + 2% Medicare Levy (47%).


Are the safe harbour terms mandatory?

No.  A related party LRBA can meet the arms-length requirements but not meet the strict safe harbour requirements.

A few examples include:

  • An existing limited recourse borrowing arrangement with a bank lender is re-financed to a related party on identical terms; or
  • An SMSF is approved for a loan with a bank lender and provided a loan contract but instead decides to obtain finance from a related party lender on identical terms

The above examples are not exhaustive. However, the onus is on the trustees of the SMSF to demonstrate the related party LRBA is established and maintained on an arms-length basis, and the safe harbour provisions are the simplest and easiest to do this.

Also, an SMSF can obtain a limited recourse loan from a private non-bank lender.  Such a loan, if not from a related party of the SMSF or its members, does not need to comply with the safe harbour terms.


Who is a related party of an SMSF?

A related party of an SMSF is any of the following:

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

The above list is not exhaustive.  Refer to the following article for more: Who is a related party of an SMSF?


Who should be the lender for an SMSF related party LRBA?

There is no limitation on who can the lender in a related party LRBA, however, thought should be given to who should be the lender.

The most common related party lender would be a member or members of the SMSF.  If you have two members in a couple, you need to think about which or both members should be the lender.

For members of an SMSF to be able to lend to their fund to finance a purchase of real property (residential or commercial) they need to have the financial capacity to do so. Money to lend to the SMSF can come from either existing loan facilities or cash savings or a mix of both.

At the time of publishing this article, we are in a very low-interest rate environment and the interest rates for owner-occupier home loans are as low as 2.00% to 2.50% – which is less than half the 2020-21 SMSF related party loan interest rate of 5.10%.  This means that if members of an SMSF secured a loan against their residence and on-lent the monies to the SMSF, there would be an interest rate difference of around 2.60% per annum.

On a loan of $300,000, this would equate to $7,800 in additional interest per year, as the SMSF member would be borrowing at 2.50% and on-lending to the SMSF at 5.10%.  The interest on the monies borrowed against their residence is tax deductible and the interest paid to the SMSF member is taxable income.  If the entire $300,000 was lent to the SMSF from savings, then the interest payable at 5.10% would equate to $15,300. Both these examples are simple calculations and don’t take into account the amortisation of the loans (the actual interest would be lower as the principal is repaid).

For the above reasons, selecting the most appropriate SMSF member or entity as the related party lender is critical.  Ideally, if one member has a lower taxable income they should be the lender.  Another strategy is to use concessional contributions to contribute the excess interest back into the SMSF.  This makes the strategy ‘tax neutral’ – i.e. the personal taxable income of the members is unchanged and the additional taxable contributions received by the SMSF are offset by the tax deductible interest paid.  The primary constraint is the member’s $25,000 concessional contribution cap – so advice should be sought in this regard.

It’s also possible for the following related parties to be lenders:

  • A family trust controlled by the members;
  • Family members of the SMSF members;
  • Another SMSF related to the members;
  • A company controlled by the members;

There are additional Division 7A requirements when a related company is the lender under a related party LRBA.  Seek specific advice if you are looking at this option.


Related party LRBA FAQs

The following are answers to common questions on related party SMSF borrowing arrangements:

What is the current ATO safe harbour interest rate?

The current ATO safe harbour interest rate for 2023/24 is 8.85% for property and 10.85% for listed shares or units. According to the ATO website, the interest rate has increased by 3.50% from 5.35% / 7.35% for the 2022/23 financial to 8.85% / 10.85% per year.

What does LRBA stand for?

LRBA = Limited Recourse Borrowing Arrangement.  This means in the SMSF as the borrower defaults, only the property used as security for the loan can be taken by the bank to settle the debt.  Of course, when an SMSF borrows from a bank lender, the bank will typically require the members of the SMSF to act as personal guarantors on the SMSF loan to further protect their interests.

Can I lend money to my own SMSF?

Yes, you can, however, you can only do so using the above safe harbour rules.  An SMSF typically cannot borrow or maintain a borrowing except in very limited circumstances.

Should I lend money to my SMSF?

That depends on a number of factors.  Although you can lend money to your SMSF for an LRBA, you typically cannot lend your SMSF money for any other reason such as a cash flow shortage to pay expenses or taxes. If you’re asking yourself “Should I lend money to my SMSF?” you probably need to get in touch with an SMSF specialist advisor to clarify your question and seek guidance.

Can a self-managed super fund borrow money to buy a property?

Yes, this is called a limited recourse borrowing arrangement. The SMSF can borrow using an SMSF loan from a bank or private lender, and also from a related party such as a member of the SMSF as outlined in this article.

Can an SMSF provide a guarantee?

No. The SMSF cannot provide a guarantee or security or any other assistance to members or their relatives. It is possible for a member of an SMSF to provide a lender (including a bank, private lender or related party lender) a personal guarantee as part of a limited recourse borrowing arrangement.

Can SMSF lend money to a related party?

No. Your SMSF cannot lend you or any of your relative’s money. Making this type of loan must be avoided: it’s not a way of legally accessing super early via an SMSF. Section 65 of the SIS Act prohibits superannuation funds, including SMSFs, from providing financial assistance to members or their relatives.

Can you refinance an SMSF loan?

An SMSF can refinance an existing SMSF loan. Unfortunately, the SMSF loan marketplace is not as deep as it used to be as the big four banks and Macquarie exited a number of years ago and mainly smaller banks and second-tier lenders have SMSF loan products.  To compound things, many of these lenders don’t accept refinances – they only take on loans for new purchases. You can also refinance a related party LRBA provided the safe harbour interest rates, loan term and other criteria are met.

Can my SMSF borrow to purchase property overseas?

Yes, this is possible but difficult, and the safe harbour provision still applies (they are silent on whether the real property needs to be in Australia).

The following article has a section and a list of considerations when an SMSF is considering buying overseas property as part of its investment strategy: Buying property with super – SMSF property investment FAQs


How Grow can help with related party LRBAs

Grow SMSF can assist with the following:

  • Setting up an SMSF (where you’ve made the decision this is a suitable strategy for you);
  • Referring you to a licensed financial adviser for advice on SMSF, property investment, insurance, super rollovers etc;
  • Setting up a bare trust or SMSF LRBA (either for a bank lender or related party lender);
  • Preparing related party SMSF loan agreements that comply with the safe harbour rules;
  • Preparing a loan amortisation schedule to determine monthly payments required on a related party LRBA;
  • Organising a mortgage to be registered against the SMSF property title relating to the LRBA;
  • Tax advice on the implications of using specific related party lenders;

As this article shows, a related party borrowing arrangement can be a very useful strategy when used correctly, however, the consequences of getting it wrong are severe. Always seek advice from an experienced SMSF Specialist Advisor and contact us if you have questions.


One comment

  • Liam Shorte

    October 13, 2012 at 12:10 pm

    Good blog Kris. People need to do their own research and spend time learning the process involved before looking at implementing the SMSF borrowing strategy. I believe the sooner the ATO clamp down on who can advise on these products the better for clients and those committed long term to the SMSF sector.

Comments are closed.

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