SMSF Borrowing Rules: Flexibility and Exceptions for Trustees

Under Australia’s SMSF borrowing rules, trustees are generally prohibited from borrowing money or maintaining an existing borrowing. This restriction exists to ensure compliance with the sole purpose test, which requires self‑managed superannuation funds (SMSFs) to be maintained solely for providing retirement benefits to members or death benefits where a member dies before retirement.

However, the Superannuation Industry (Supervision) Act 1993 (SIS Act) allows limited flexibility through specific exceptions. Understanding when borrowing is permitted, and the strict conditions that apply, is critical for SMSF trustees to remain compliant.

This article explains SMSF borrowing rules, with a focus on Section 67 of the SIS Act, relevant exemptions, and trustee accountability.

Borrowing Defined for SMSFs (SMSFR 2009/2)

SMSF Ruling SMSFR 2009/2 provides guidance on what constitutes borrowing for SMSF purposes.

Borrowing includes any arrangement involving:

A temporary transfer of money from a lender to an SMSF
An obligation or intention for the SMSF trustee to repay that amount, either in money or through the provision of an asset

For SMSF purposes, money includes any generally accepted medium of exchange, including Australian or foreign currency.

Maintaining an Existing Borrowing

An SMSF is considered to be maintaining an existing borrowing where:

A prior borrowing arrangement remains in place, or
The trustee becomes liable under a borrowing arrangement originally entered into by another party

Transactions Considered Borrowing

Examples include:

Secured or unsecured loans
Margin lending accounts once drawn upon
Bank overdrafts once drawn upon

Transactions Not Considered Borrowing

Examples include:

Genuine member contributions accepted under the Superannuation Industry (Supervision) Regulations 1994
Liabilities to pay member benefits as they fall due
Expenses paid on behalf of the SMSF with immediate reimbursement
Normal commercial delays in processing SMSF expenses

SMSF Borrowing Rules: Section 67 Exceptions

Section 67 of the SIS Act provides limited exceptions to the general borrowing prohibition. These exceptions allow trustees to manage short‑term liquidity issues or undertake specific investment strategies under strict conditions.

Temporary Borrowing to Pay Benefits

Temporary borrowing is permitted where:

The payment is required under law or the fund’s trust deed
The trustee cannot make the payment without borrowing
The borrowing does not exceed 90 days
The borrowed amount does not exceed 10% of the fund’s total asset value

Temporary Borrowing for Settlement of Securities

SMSFs may borrow temporarily to settle certain security transactions if:

Borrowing was unlikely at the time the investment decision was made
The borrowing does not exceed 7 calendar days (a strict limit)
The borrowed amount does not exceed 10% of total fund assets

Limited Recourse Borrowing Arrangements (LRBAs)

SMSF borrowing rules also permit limited recourse borrowing arrangements, provided that:

The borrowing is used to acquire a single acquirable asset
Borrowed funds may cover acquisition and ongoing costs, but not improvements
The asset is held on trust until the borrowing is repaid
The trustee has the right to acquire legal ownership after making one or more payments
The lender’s rights are limited solely to the acquirable asset
No other charge exists over the asset

Installment Warrants and Grandfathered Arrangements

Some installment warrant arrangements entered into before the introduction of the LRBA rules in 2007 may continue under transitional or grandfathering provisions, subject to ongoing compliance.

Other Areas of SMSF Flexibility

While borrowing restrictions are strict, the SIS Act provides trustees with flexibility in other areas, provided legislative conditions are met.

Related Party Transactions

SMSFs may:

Lease business real property to a related party where the terms are at arm’s length and the property is used wholly and exclusively for business purposes
Invest in certain related non‑geared trusts or companies under SIS Regulation 13.22C

In‑House Asset Rules (Section 71)

In‑house assets must not exceed 5% of the fund’s total market value
These include loans to related parties, investments in related parties, and assets leased to related parties

Acquisitions from Related Parties (Section 66)

SMSFs may only acquire assets from related parties where:

The acquisition is at market value, and
The asset is a listed security, business real property, or otherwise excluded under the SIS Act

Trustee Accountability and Compliance

The SIS Act is designed to safeguard members’ retirement savings. While SMSF borrowing rules allow limited flexibility, trustees carry significant responsibility.

Trustees must:

Understand the conditions attached to each exception
Apply the exemptions correctly
Maintain comprehensive records to demonstrate compliance

When applied appropriately, the borrowing flexibilities and exemptions within the SIS Act can support prudent fund management while maintaining regulatory integrity.

Borrowing and LRBA arrangements are a key focus area in SMSF audits. National Audits Group provides independent, specialist SMSF audit services, with deep experience reviewing borrowing structures and compliance with the SIS Act.

Find out more about our SMSF audit services or speak with our team today.