Can SMSF Lend Money to a Third Party?

Introduction: Navigating the complexities of Self-Managed Super Fund (SMSF) regulations is crucial for trustees who aim to maximize their fund’s potential while remaining within the legal framework set by the Australian Taxation Office (ATO). A common question that arises in the realm of SMSF investments is “Can SMSF lend money to a third party?” This article explores the possibilities, restrictions, and considerations associated with SMSF lending to third parties, ensuring trustees can make informed decisions that align with compliance requirements.

The Legal Framework

At its heart, an SMSF is established for the primary purpose of providing retirement benefits to its members. The Superannuation Industry (Supervision) Act 1993 (SIS Act) and regulations provided by the ATO offer a strict guideline on what SMSFs can and cannot do, including the rules surrounding lending practices.

Lending to Third Parties

Yes, SMSFs are permitted to lend money to third parties under certain conditions. However, these transactions must be carried out with the care, skill, and diligence of a prudent superannuation trustee, ensuring the fund’s investment strategy and members’ best interests are always at the forefront. Key considerations include:

  1. Compliance with the Investment Strategy: The loan must fit within the fund’s documented investment strategy, taking into account diversification, risk, return, liquidity, and the fund’s ability to meet its liabilities.
  2. Arm’s Length Terms: The loan terms must be consistent with an arm’s length dealing. This means the interest rate, repayment schedule, and security requirements should reflect what a reasonable person would expect from a similar arrangement in the open market.
  3. Documentation and Due Diligence: Trustees must document the loan agreement thoroughly, outlining clear terms and conditions, and conduct due diligence to assess the borrower’s ability to repay the loan. Proper record-keeping and monitoring are essential to ensure ongoing compliance.
  4. No Lending to Members or Relatives: It’s crucial to note that SMSFs are strictly prohibited from lending money to fund members or their relatives. Breaching this rule can lead to significant penalties and risks the fund’s compliant status.

Risk Management and Compliance

Lending money to third parties involves inherent risks, including the potential for default. SMSF trustees must evaluate the risk against the expected return and consider how the loan fits within the broader investment strategy of the fund. Regular review of the investment strategy and the performance of the loan is advisable to ensure alignment with the fund’s objectives and compliance with regulatory requirements.



While SMSFs can lend money to third parties, such transactions must be approached with caution and diligence. Trustees should ensure that all lending activities are in the best interests of the members, reflect arm’s length terms, and comply with the SIS Act and ATO guidelines. Seeking advice from a financial advisor or legal professional specializing in superannuation law is recommended to navigate the complexities of SMSF lending, ensuring both compliance and the optimal use of the fund’s assets for the benefit of its members.

Understanding the rules and undertaking thorough due diligence can enable SMSF trustees to explore lending to third parties as part of a diversified investment strategy, contributing to the fund’s growth and members’ retirement outcomes.

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Sandra - SMSF Advisor

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