Key Risks When Refinancing SMSF Loans From Related Parties

Refinancing an SMSF loan from a related party to a commercial lender is a new loan contract, and the compliance position is tested again on the day it happens.

Key risks at refinance include the LRBA structure, the date the original loan was entered into, and missing paperwork. This article is for Adelaide trustees holding a property under a related party loan who are considering a move to a bank or non-bank lender.

Does Refinancing a Related Party SMSF Loan Count as a New Loan?

Yes. The ATO treats a refinance of a limited recourse borrowing arrangement (LRBA) as a new loan contract for the same asset, with the same or a new lender.

This means the new loan must meet the LRBA requirements that apply on the day of refinance. If the original arrangement was entered into between 24 September 2007 and 6 July 2010, the current rules apply to the new loan. If you are weighing up an SMSF loan refinance, start by confirming when your original LRBA was entered into, because that date decides which business real property rules apply.

The Business Real Property Rule: The Mistake That Depends on Your Start Date

For LRBAs entered into before 10 August 2026, refinancing on or after that date does not require the property to be business real property. This applies whether the property is residential or commercial.

The rule changed under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (Cth). For LRBAs entered into on or after 10 August 2026, real property must be business real property, meaning land and buildings used wholly and exclusively in one or more businesses. A binding contract exchanged before that date is also covered by the earlier rule, even if settlement falls later.

The mistake is assuming the new rule affects every refinance, or assuming it affects none. A pre-10 August 2026 LRBA keeps its treatment on refinance. A significant change to a contract can be treated as a new arrangement, so do not vary terms casually before refinancing. Where the new rule does apply, the property must stay business real property for the life of the loan. Otherwise the fund has breached the borrowing prohibition.

Arm's Length Terms: Why Related Party Loans Create Tax Exposure

A related party lender can only charge the SMSF an arm's length rate, and the trustee must be able to prove it. If the loan fails that test, income can be treated as non-arm's length income (NALI), which is taxed at 45 per cent.

The ATO's PCG 2016/5 sets out safe harbour terms. A loan that misses those terms is not automatically non-arm's length, but you need documents that show it was. A written loan agreement is essential. Without one, the amount advanced might be treated as a contribution to the fund.

A commercial lender may ask for the existing loan documents and how the loan has operated. Gaps in the paperwork, or rates that drifted from arm's length, are ideally fixed before application. Speak to your accountant or the fund's adviser about tax consequences, as outcomes depend on your circumstances.

Scenario: A Related Party Loan Refinanced to a Commercial Lender

Consider an Adelaide SMSF with a related party loan on an investment property, entered into before 10 August 2026. The trustees want to move to a commercial lender and use an offset account.

Situation: The loan was documented loosely. The interest rate was set by the lender and never reviewed against objective data. The trustees assumed the new business real property rule would block the refinance.

Solution: The broker confirms the original LRBA date, so the property does not need to be business real property for the refinance. The trustees then assemble the written loan agreement and a record of how the rate compares with Reserve Bank of Australia Indicator Lending Rates. They also confirm that the new loan will fund only the payout and refinance costs, with no capital improvements, and that the property remains in the existing holding trust.

Outcome: The new lender receives a clean file. The loan is paid out by the new lender at settlement. For illustration only, at 6.75% p.a. on a $600,000 balance, interest alone is about $40,500 a year, or around $3,375 a month. The real rate and balance will differ, so use a calculator to test your own numbers.

The trade-off is cost. Break costs, discharge fees, valuation fees and legal fees can apply, and a new lender may set different serviceability and loan to value terms.

Refinance Mistakes That Breach LRBA Rules

Key LRBA breaches at refinance involve how the new loan is structured. The loan must be for the same single asset and must not fund improvements.

Check these before you apply:

• Borrowing extra to renovate or improve the property. Drawdowns for capital improvements are not allowed.
• Cross-securing the property against other debt. The asset cannot be used as security for anything other than the LRBA.
• Letting the fund take title temporarily. If a new holding trust is created, the asset must transfer directly to it.
• Using a discretionary trust or a unit trust with several unit holders as the holding trust.
• Including an existing fund asset in the LRBA.

A personal guarantee from a related party is permitted, but the guarantor's recourse is limited to the asset in the arrangement.

Offset Accounts and Lender Choice in an SMSF Refinance

A genuine offset account from an authorised deposit-taking institution (ADI) is allowed in an SMSF loan because it is not a borrowing or a charge over fund assets. Offset accounts from non-ADI lenders are not bank deposits.

If an offset matters to you, confirm the lender is an ADI before you compare SMSF refinance lenders. Lenders differ on property type, loan to value limits and documentation, so a specialist SMSF refinance broker can match the loan to your asset. The type of property matters too. Pages on SMSF commercial property loans and SMSF investment property loans outline how each is assessed.

Total Super Balance Effects When You Replace a Related Party Loan

A member's share of an outstanding LRBA balance is included in their total super balance in some cases. This includes LRBAs entered into on or after 1 July 2018 where the lender is a related party or associate, or the member has met a condition of release with no cashing restriction.

Some LRBAs from before 1 July 2018 that are refinanced on or after that date are also included. The exception applies where the new borrowing is secured by the same asset and the refinanced amount is the same or less than the existing loan. LRBA amounts are never included for Division 296 purposes. Check how this affects contribution caps and other thresholds with your accountant before settlement.

A related party loan also needs to be paid out in full at settlement, so allow time for the lender, the holding trust and your solicitor to coordinate. The ATO is consulting on draft updates to SMSFR 2012/1 and SMSFR 2009/1, with comments due by 13 November 2026. The drafts are not final.

If you hold a related party loan in Adelaide and want to know whether it can move to a commercial lender, call one of our team or book an appointment at a time that works for you through our booking page.

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