Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 227

Mistakes in SMSFs on related party loans

There are a significant number of professionals giving out some seriously wrong advice on related party lending. Some believe that an SMSF can lend up to 5% of the value of its assets to fund its members or the members’ relatives.

Loans to members or their relatives are prohibited by the superannuation law and you can get into trouble with the Tax Office for going down this path.

Why are professionals getting this wrong?

The reason for the mistake is that superannuation law does allow lending of up to 5% to a ‘related party’ of an SMSF, but there is a qualification people miss. The law is referred to as ‘in-house asset’ and is covered by section 71 in Part 8 of the superannuation law.

I prefer to write in plain English and I don’t normally quote sections of legislations when I write, but bear with me and you will soon understand why I need to do so in this article.

Another area of the superannuation law prohibits a trustee of an SMSF from lending or giving financial assistance to members and relatives. This law appears at section 65 of the superannuation law.

Reading on to subsection 65 (7) of the law states, “Nothing in Part 8 limits the operation of this section”. Essentially, this means that section 65 overrides section 71 which is in Part 8 of the superannuation law. SMSFs can never lend to their members or members’ relatives, not even under the 5% in-house asset limit, regardless of what is allowed under section 71.

Can an SMSF lend to a party who is not a member or a relative of a member of an SMSF?

The good news is it can. An SMSF can lend up to 5% of the total value of its assets to a related entity such as a related company or a related unit trust. It can also lend an unlimited amount to a member’s cousin or their former spouse (who are not members of their SMSF) because they are not considered related parties.

The reason an SMSF can lend to a cousin or a former spouse is because the definition of a ‘relative’ under the general definition in section 10 of the superannuation law does not include a cousin and former spouse. However, just to keep us on our toes, the definition of a relative under section 17A does include a cousin and a former spouse.

The section 17A definition covers the legal structure of an SMSF. It determines which individuals can be in an SMSF together. The section 10 definition, on the other hand, covers investment transactions involving related parties.

So, if your cousin or your former spouse is not a member of your SMSF, then you can lend to them. But if they are members of your SMSF, then your SMSF cannot lend to them.

The superannuation law can be complex as it has various twists. The fact that professionals can get it wrong suggests that if you receive advice that seems too good to be true, get a second opinion. It helps to have a good working knowledge of the law in spotting advice that is not up to the mark.


Monica Rule is an SMSF Specialist and author of The Self Managed Super Handbook – Superannuation Law for SMSFs in plain English. See


The impact of our marriage breakdown on our SMSF

Court holds SMSF trustees accountable

5 common mistakes in running an SMSF


Most viewed in recent weeks

10 little-known pension traps prove the value of advice

Most people entering retirement do not see a financial adviser, mainly due to cost. It's a major problem because there are small mistakes a retiree can make which are expensive and avoidable if a few tips were known.

Check eligibility for the Commonwealth Seniors Health Card

Eligibility for the Commonwealth Seniors Health Card has no asset test and a relatively high income test. It's worth checking eligibility and the benefits of qualifying to save on the cost of medications.

Hamish Douglass on why the movie hasn’t ended yet

The focus is on Magellan for its investment performance and departure of the CEO, but Douglass says the pandemic, inflation, rising rates and Middle East tensions have not played out. Vindication is always long term.

Start the year right with the 2022 Retiree Checklist

This is our annual checklist of what retirees need to be aware of in 2022. It is a long list of 25 items and not everything will apply to your situation. Run your eye over the benefits and entitlements.

At 98-years-old, Charlie Munger still delivers the one-liners

The Warren Buffett/Charlie Munger partnership is the stuff of legends, but even Charlie admits it is coming to an end ("I'm nearly dead"). He is one of the few people in investing prepared to say what he thinks.

Should I pay off the mortgage or top up my superannuation?

Depending on personal circumstances, it may be time to rethink the bias to paying down housing debt over wealth accumulation in super. Do the sums and ask these four questions to plan for your future.

Latest Updates

Investment strategies

Three ways index investing masks extra risk

There are thousands of different indexes, and they are not all diversified and broadly-based. Watch for concentration risk in sectors and companies, and know the underlying assets in case liquidity is needed.

Investment strategies

Will 2022 be the year for quality companies?

It is easy to feel like an investing genius over the last 10 years, with most asset classes making wonderful gains. But if there's a setback, companies like Reece, ARB, Cochlear, REA Group and CSL will recover best.


2022 outlook: buy a raincoat but don't put it on yet

In the 11th year of a bull market, near the end of the cycle, some type of correction is likely. Underneath is solid, healthy and underpinned by strong earnings growth, but there's less room for mistakes.


Time to give up on gold?

In 2021, the gold price failed to sustain its strong rise since 2018, although it recovered after early losses. But where does gold sit in a world of inflation, rising rates and a competitor like Bitcoin?

Investment strategies

Global leaders reveal surprises of 2021, challenges for 2022

In a sentence or two, global experts across many fields are asked to summarise the biggest surprise of 2021, and enduring challenges into 2022. It's a short and sweet view of the changes we are all facing.


What were the big stockmarket listings in record 2021?

In 2021, sharemarket gains supported record levels of capital raisings and IPOs in Australia. The range of deals listed here shows the maturity of the local market in providing equity capital.


Let 'er rip: how high can debt-to-GDP ratios soar?

Governments and investors have been complacent about the build up of debt, but at some level, a ceiling exists. Are we near yet? Trouble is brewing, especially in the eurozone and emerging countries.



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.