Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Register

5 November 2026

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 www.monicarule.com.au.

 

  •   16 November 2017
  • 2
  •      
  •   

RELATED ARTICLES

The mechanics of the $3 million super tax must be fixed

Valuable super contribution changes are now law

The impact of our marriage breakdown on our SMSF

Firstlinks is sponsored by:
banner

Most viewed in recent weeks

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

The retirement scorecard: how many of these questions can you answer?

From the maths of retirement, estimating spending and picking the right asset allocation to survive a poor decade, here are the questions every retiree – current or future – should be able to answer for themselves.

Division 296: the initial moves to make before the windows close

What if the best superannuation strategy isn't about earning more, but acting before your options disappear? Several overlooked planning windows are narrowing, with consequences that can last for decades.

Testamentary trusts: Treasury has picked the wrong reading

A decades-old estate planning tool has survived one tax crackdown only to be caught by another. The surprise isn't who the reform is targeting, but who could end up paying the price for drafting choices made years ago.

Higher yields are creating opportunities in global bonds

Bond markets are adjusting to a new reality, but not in the ways investors expect. With markets repricing and capital competing for attention, investors may need to rethink where resilience and opportunity lie. 

Will investors be better or worse off under new housing tax changes?

Housing tax reforms have sparked warnings of market turmoil and promises of greater fairness. But after modelling nearly two decades of property data, the results suggest winners and losers may not be who many investors expect.

Latest Updates

Superannuation

Superannuation’s structural failings

Politicians are fighting over access to super, but they may be arguing about the wrong thing. The system’s three fundamental flaws have been hiding in plain sight for decades, costing Australians far more than they realise.

Planning

The great wealth transfer myth

Why do some families preserve wealth for generations while others struggle to? As the great wealth transfer unfolds, the determining factor is often not the structure of the estate, but the preparation of those who will inherit it.

Investment strategies

What comes after bank hybrids?

For years, bank hybrids have been a cornerstone of portfolio income. With tens of billions of dollars now disappearing from the market, investors face a critical question: what comes next, and are the obvious replacements enough?

Investment insights from the US

What happens when knowledge becomes a commodity? The latest themes emerging from the US tech sector suggest AI could reshape company moats, disrupt incumbents and create winners and losers in unexpected places.

Investing

Can Berkshire thrive without Buffett?

Warren Buffett's departure marks the end of an era. But the more important question for investors is whether Berkshire's culture, discipline and capital allocation framework can survive without the man who built them.

Retirement

The Bengen 4% Rule: Lost in translation

For years, retirees have been told to focus on withdrawal rates. But the real question is far simpler: how many dollars can you safely spend? The answer may be very different from what conventional retirement wisdom suggests.

Interest rates

Super low interest rates came with side effects

For more than a decade, investors lived through an era of near-zero interest rates. With bond yields now surging, it's worth asking whether cheap money solved economic problems, or introduced a much larger set of risks.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

Site Map

About Firstlinks

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
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. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. 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.