How to Refinance an SMSF Loan & Meet ATO Safe Harbour Rules

Refinancing an SMSF loan triggers compliance questions that don't exist in conventional lending.

The ATO treats a significant change to your existing limited recourse borrowing arrangement as the end of one arrangement and the start of another. Whether that matters depends on when your original LRBA commenced and what type of asset secures it. For South Australian trustees holding residential property under pre-commencement LRBAs or those with commercial assets, the practical concern is maintaining the limited recourse character and meeting arm's length terms through the refinance.

When Refinancing Ends Your Existing LRBA

A refinance ends your existing arrangement if the new terms are inconsistent with the original LRBA structure. Switching lenders alone does not automatically trigger this, but changing the asset being secured, altering the borrowing entity, or modifying ultimate beneficiaries will. The ATO has not yet published updated guidance following the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, so the existing position under Practical Compliance Guideline PCG 2016/5 remains the operational standard.

Consider a trustee who established an LRBA in 2023 to acquire a residential property in Adelaide's inner suburbs. The original loan was taken with Lender A at a fixed rate that has now expired. The trustee refinances the SMSF loan to Lender B on a variable rate, maintaining the same property as security and the same holding trust structure. The refinance continues the existing arrangement because the asset, entity, and beneficiaries remain unchanged. The new loan must still satisfy limited recourse requirements and meet arm's length interest rate terms.

Safe Harbour Interest Rates and Non-Arm's Length Income Risk

The refinanced loan must satisfy arm's length terms or risk having income from the arrangement taxed at 45 percent as non-arm's length income. PCG 2016/5 sets safe harbour interest rates that the ATO updates annually. These rates apply to both real property and listed securities, and they apply regardless of when your LRBA commenced. A refinance at a rate below the safe harbour benchmark exposes the fund to NALI treatment on rental income or other returns generated by the asset.

In a scenario where a South Australian SMSF holds a commercial property in the CBD and refinances at a discounted rate offered by a related party lender, the interest shortfall creates a non-arm's length advantage. The ATO's position is that all income derived from that asset, not just the interest saving, becomes non-arm's length income. A compliant refinance uses the published safe harbour rate as the floor, and any rate negotiated with an unrelated lender that sits at or above that benchmark satisfies the guideline.

Limited Recourse Character Through Refinancing

The lender's recourse in the event of default must remain limited to the asset being acquired under the arrangement. This limited recourse character is a statutory requirement under section 67A of the Superannuation Industry (Supervision) Act and must be maintained through any refinance. If the new lender requires broader recourse over other SMSF assets or over the trustees personally without limitation to the secured asset, the refinance breaches the compliance conditions.

A related party may provide a personal guarantee to support the refinance, but their recourse must also be limited to the asset under the arrangement. This means the guarantor cannot claim against other SMSF assets if the property is sold and a shortfall remains. Most specialist SMSF lenders structure their security documentation to preserve this limited recourse character, but it must be confirmed in the loan agreement and security deed before settlement.

Residential LRBA Refinancing and the 2026 Restriction

The restriction on new residential LRBAs introduced under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 does not apply to maintaining or refinancing a borrowing under an arrangement entered into before the commencement date. This means residential SMSF loans established before the restriction came into effect can be refinanced without triggering the prohibition, provided the refinance does not constitute a new arrangement under the ATO's existing position.

A trustee in Adelaide who acquired a residential investment property under an LRBA in early 2025 can switch lenders or move from a fixed rate to a variable rate without falling under the new restriction, as long as the same property remains the secured asset and the holding trust structure is unchanged. If the trustee instead seeks to refinance and draw additional funds to acquire a second residential property, that would constitute a new arrangement post-commencement and would breach the prohibition.

Offset Accounts and Refinance Structuring

Genuine offset accounts offered by an authorised deposit-taking institution are not treated as a borrowing or a charge over fund assets under current ATO guidance. This means a refinance that includes an offset facility does not breach the single acquirable asset rule or create a secondary borrowing, provided the offset is structured correctly. The offset must function as a linked deposit account that reduces interest calculated on the loan balance, rather than as a line of credit or redraw facility that allows further borrowing.

South Australian trustees refinancing to access an offset account should confirm the facility meets the ATO's definition. The offset must be maintained in the name of the SMSF, not the holding trust or the individual trustees, and the funds in the offset must be SMSF assets. The benefit is that surplus cash held in the offset reduces the effective interest rate on the LRBA without requiring additional contributions or violating in-house asset rules.

Commercial LRBA Refinancing Compliance

Refinancing of commercial LRBA arrangements is not affected by the 2026 restriction. Compliance conditions continue to require that the refinanced loan relates to the same single acquirable asset, maintains the limited recourse character of the original arrangement, and meets arm's length terms consistent with PCG 2016/5. Commercial refinances can switch lenders, adjust rates, or move between fixed and variable terms without creating a new arrangement, provided the asset and structure remain consistent.

A fund holding a commercial property in a South Australian regional centre can refinance an expiring fixed rate to a variable rate with a different lender, maintaining the same property as security and the same holding trust. The refinance satisfies compliance conditions if the interest rate meets the safe harbour benchmark for commercial property and the loan documentation preserves limited recourse. Any attempt to draw additional funds to improve the property or acquire a second asset would create a new borrowing and would need to satisfy the LRBA rules independently.

Application and Settlement Requirements

The refinance application must be made in the name of the holding trust as borrower, with the SMSF trustee as guarantor to the extent of the secured asset. The loan offer, security documentation, and settlement statements must all reflect this structure. The lender will require updated valuations, financial statements for the SMSF, and confirmation that the holding trust remains compliant with the bare trust requirements.

Settlement of the refinance discharges the original lender's security and registers the new lender's interest over the property. The holding trust deed must remain in place, and the property title must remain in the name of the holding trust, not the SMSF itself. Any change to the registered proprietor during refinance would breach the single acquirable asset rule and end the existing arrangement.

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