Common Mistakes When Refinancing Related Party SMSF Loans

Related party loans inside an SMSF need to meet the same arm's length requirements as commercial arrangements.

When a Self-Managed Super Fund acquires property using a loan from a member or related entity, the arrangement must comply with limited recourse borrowing rules and meet arm's length terms. Many trustees eventually refinance to a commercial lender to access lower rates, offset accounts, or release capital from the original lender. That transition involves specific compliance steps that differ from standard residential refinancing.

Arm's Length Terms Apply Before and After Refinancing

A related party loan must charge an interest rate and include terms that would apply between unrelated parties dealing at arm's length. The ATO publishes safe harbour interest rates annually under Practical Compliance Guideline PCG 2016/5, covering both real property and listed securities. If the original loan charged below these safe harbour rates, income from the LRBA may be assessed as non-arm's length income and taxed at 45 percent rather than the concessional super rates. This applies regardless of when the arrangement commenced. Refinancing to a commercial lender does not retrospectively fix a non-compliant related party loan, but it does prevent ongoing non-compliance from the settlement date forward.

Limited Recourse Character Must Continue Through Settlement

The lender's recourse in the event of default must remain limited to the asset acquired under the arrangement, with no claim against other SMSF assets. When refinancing from a related party to a commercial lender, the new loan contract must preserve this limited recourse character. Most commercial lenders offering SMSF loan refinance products structure their security documentation to meet this requirement, but the trustee remains responsible for confirming compliance. A related party may provide a personal guarantee to the new lender, but their recourse must also be limited to the property held under the arrangement, not the broader fund assets.

The Same Single Acquirable Asset Rule

Refinancing an LRBA means entering into a new loan contract for the same asset acquired under the original arrangement. You cannot use the refinance to acquire a different property, add additional assets to the security, or consolidate multiple LRBAs without triggering a new arrangement. Consider a Brisbane SMSF that originally borrowed from a member to acquire a commercial property in Fortitude Valley. The trustees later refinance to a bank to access a lower variable rate and an offset account. The new loan must relate solely to the Fortitude Valley property. If the trustees attempt to secure the loan against a second property held by the fund, the ATO would treat this as a new arrangement, not a refinancing of the existing LRBA.

Residential LRBAs Established Before 10 August 2026

Trustees with compliant residential LRBAs in place before 10 August 2026 can refinance to another lender without the refinanced arrangement being subject to the post-commencement prohibition on new residential LRBAs. The refinancing must remain consistent with the original arrangement. Refinancing that is inconsistent with the original arrangement, borrowing to acquire an asset not contemplated under the original terms, or changes to the ultimate beneficiaries of the arrangement may end the existing LRBA and create a new one. A new arrangement entered into on or after 10 August 2026 involving residential property cannot proceed. This does not affect SMSF commercial property loans, which remain available for both new acquisitions and refinancing.

Offset Accounts and Cash Flow Management

Genuine offset accounts offered by an authorised deposit-taking institution are not treated as a borrowing or a charge over fund assets. Many commercial lenders now offer offset facilities on SMSF variable rate loans, allowing the fund to park cash from rental income, pension payments, or concessional contributions and reduce interest charges without making advance repayments. A related party loan typically does not include an offset account. Refinancing to a commercial lender can deliver material interest savings where the fund holds cash reserves that would otherwise sit in a low-interest transaction account. The offset account must be held in the name of the bare trustee that holds the property, not the SMSF trustee directly, to maintain compliance with the single acquirable asset rule.

Fixed Rate Expiry and Revert Rates

Related party loans occasionally include fixed rate terms, particularly where the member-lender wants certainty over repayments. When a fixed term ends, the loan typically reverts to a variable rate set by the related party. That revert rate must still meet arm's length terms at the time it applies. If the revert rate is set above or below the ATO's safe harbour range without commercial justification, the income may be treated as non-arm's length income. Refinancing to a commercial lender before the fixed term ends may involve break costs, calculated by the related party lender in the same way a bank would apply them. PCG 2016/5 does not provide specific guidance on break cost calculations, so the calculation method should reflect market norms and be documented.

Settlement Timing and Trustee Resolution

Refinancing from a related party to a commercial lender requires a trustee resolution authorising the new borrowing, discharge of the existing loan, and any changes to the holding trustee or security documentation. The resolution should confirm that the refinancing relates to the same single acquirable asset, maintains limited recourse terms, and is entered into on arm's length terms. Settlement must occur simultaneously so there is no period where the asset is unencumbered or held outside the LRBA structure. Most specialist SMSF refinance brokers coordinate settlement timing with the related party lender, the new commercial lender, and the fund's solicitor to avoid any gap in the arrangement. The discharge of the related party loan should be documented with a discharge of mortgage and formal release, even where the lender is a member or related entity.

Application and Valuation Requirements

Commercial lenders assess SMSF refinance applications using the same serviceability and valuation criteria that apply to new SMSF acquisitions. The fund must demonstrate sufficient income from the property, member contributions, or other sources to service the proposed loan. Lenders typically require a current valuation of the property, even where the loan-to-value ratio is low. The valuation must reflect the market value of the asset as at the date of application, not the original acquisition price. For commercial properties in Brisbane precincts such as South Brisbane, Newstead, or Bowen Hills, valuation timeframes can extend to two to three weeks depending on the property type and comparable sales data. The related party lender should provide a payout figure that confirms the outstanding principal, accrued interest, and any discharge or administration fees. That payout figure forms part of the commercial lender's assessment.

Call one of our team or book an appointment at a time that works for you to confirm your SMSF refinance structure meets compliance requirements and aligns with your fund's investment strategy.

Frequently Asked Questions