Low interest rates prompting LRBA refinancing

SMSF trustees should not give into the siren call of low interest rate refinancing of their Fund’s loan until they have considered these points.

In the current low-interest rate environment, there has been an increased interest in refinancing an existing limited recourse borrowing arrangement (‘LRBA’) with a related party lender.

For this financial year, the minimum interest rate under the ATO’s safe harbour guidelines is 5.10% p.a. which in most cases would be lower than what would have been available to the trustees when they originally acquired the property using an LRBA.

While the refinancing option could mean significant savings in monthly repayments for the SMFS, trustees should carefully consider the SIS Act compliance requirements in refinancing an LRBA with a related party loan, which could be more onerous to comply with than maintaining the LRBA with a bank.

Let’s consider an example of Daniel and Gladys who are members and trustees of their SMSF, Premier Superannuation Fund. They originally borrowed from a bank to acquire a commercial property under an LRBA in 2016 at the interest rate of 6.60% and are now considering refinancing it with a loan from a related private company, Premier Pty Ltd.     

The new loan must be a complying LRBA under s67A of the SIS Act
The SIS Act provides for refinancing under limited recourse borrowing arrangements when the borrowed money is applied to refinance a borrowing in relation to the single acquirable asset.

Firstly, this means the new loan from Premier Pty Ltd must be made in relation to the same commercial property and no other acquirable asset. The loan documentation should be drafted accordingly and formally establish a sufficient link between the loan and the property as the only security for the loan.

Secondly, the money so borrowed from Premier Pty Ltd must be applied solely for the purpose of replacing the financing arrangement from the earlier arrangement with the outgoing bank. The amount of the new loan therefore must not exceed the amount required to payout the bank in respect of the original LRBA.

Other than the above, the Daniel and Gladys Superannuation Fund should ensure the usual LRBA conditions are maintained in the new arrangement including the requirement to have the property held on trust (i.e. holding trust) and limiting the recourse of the lender or any other person in the event of default to only the commercial property.

Sole Purpose

The trustees should be able to demonstrate that the refinancing is for the sole purpose of retirement benefits for the members. At the very least this means Premier Pty Ltd should not unreasonably benefit from the refinancing arrangement and all engagement should be on documented arm’s length terms. An example of a possible contravention is where the SMSF trustees decide to refinance with a related party on materially similar (or inferior) terms in order to provide additional income source to a struggling related party.

Arm’s Length Requirement

The Superannuation Industry Supervision Act 1993 (“SIS Act”) requires SMSF trustees to deal with third parties at arms-length. This is a critical requirement, as it can be a criminal offence to breach the requirement.  Additionally, a breach may result in the income arising from the transaction being taxed at the top marginal rate of income tax (i.e. non-arms’ length income or NALI).

It is strongly advisable that Daniel and Gladys mirror the Practical Compliance Guidelines PCG 2016/5 which sets out ‘Safe Harbour’ terms on which SMSF trustees may structure their LRBAs consistent with an arm’s length dealing. It is not necessarily an immediate breach of the arm’s length requirement if they don’t follow the ATO’s guidelines however, the trustees would need to otherwise demonstrate that the arrangement was entered into and maintained on terms consistent with an arm’s length dealing.  

As the lender is a related private company, Division 7A of the Income Tax Assessment Act 1936 may potentially apply to treat the amount advanced as payment of dividends. In order to avoid this, Daniel and Gladys may structure the loan as a Division 7A complying loan and ensure the prescribed minimum interest charge and maximum term requirements for a secured Division 7A loan are also satisfied.  

Implications on Total Superannuation Balance

The new measure introduced by Treasury Laws Amendment (2018 Superannuation Measures No 1) Act 2019 would apply to LRBAs where:

(a)    the lender is an associate of the SMSF; or

(b)    the member or members participating in the LRBA have satisfied an unrestricted release condition (such as attained age 65 or being “retired” for superannuation purposes), regardless of whether the member is actually in retirement phase.

As Premier Pty Ltd is an associate lender of the SMSF, the outstanding loan balance each year will need to be proportioned among Daniel and Gladys to be added to their respective total superannuation balance. Once their total superannuation balance reaches $1.6 million, the member is unable to make further non-concessional contributions.


There are important compliance issues to consider when refinancing an existing LRBA. If you are exploring the potential financial benefits of low interest rate loan from a related party, please seek appropriate advice to ensure compliance.  

For further information, please call Townsends Business & Corporate Lawyers on (02) 8296 6222 or email info@townsendslaw.com.au

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