Latest ATO Rulings Affecting SMSF Property Loans

Borrowing through your SMSF can open opportunities, but it also brings a level of scrutiny that doesn’t apply to standard investment loans. Recent ATO SMSF rulings, clarifications and focus areas have made it even more important for trustees to understand how SMSF property loans must be structured and managed under a limited recourse borrowing arrangement (LRBA).

Because the ATO does not regularly overhaul LRBA rules, these updates often come as refinements rather than new legislation. Even so, they can influence how lenders assess SMSF borrowers, how accountants prepare documentation and how trustees plan their investment and repayment strategy.

Ausfirst Lending Group will walk through what has changed, where the ATO is focusing its attention and how trustees can prepare their fund for borrowing with confidence.

Why recent ATO rulings matter for SMSF property borrowers

ATO rulings and interpretive guidance shape how SMSFs must operate, but they also affect how lenders approach SMSF loans.

For trustees, this matters because:

• Lenders now rely more heavily on ATO guidance when assessing SMSF lending risk
• Auditors increasingly reference ATO rulings when reviewing compliance
• Small documentation gaps can lead to delays, forced restructures or audit queries
• NALI and NALE can have long-term tax consequences if the SMSF loan is not structured correctly under super and tax law, so it is important to seek guidance from your professional advisers from the start
  

From our position working with lenders daily as local mortgage brokers in the Sunshine Coast, we see that these updates influence credit policy, serviceability modelling, documentation expectations and turnaround times for SMSF loan applicants.

The following sections break down the changes that are shaping the lending environment right now.

Key ATO rulings and guidance released in the past 12–24 months

The ATO guidance on SMSF loans has largely focused on reinforcing existing standards rather than creating new rules. The most influential updates include:

Strengthened interpretation of NALI and NALE rules

The ATO continues to treat non-commercial terms seriously. Even minor deviations from market norms, like slightly discounted interest or flexible repayment dates, may raise NALI concerns.

Clarification of roles and relationships in LRBA structures

The ATO has reiterated that any party involved in the LRBA, especially related parties, must show clear evidence of commercial behaviour. This includes:

• Correct separation of trustee roles
• Proper execution of the holding (bare) trust
• Consistent record-keeping across all entities
  

Audit focuses on documentation and fund strategy alignment

The ATO has highlighted recurring audit issues where LRBAs were technically compliant but poorly documented. Trustees must show the LRBA aligns with the SMSF’s investment strategy, liquidity plan and risk tolerance.

Single acquirable asset requirements are explained more clearly

The ATO has provided more examples to show what qualifies as a “single acquirable asset” and when a collection of assets may be treated as a single asset. Trustees acquiring commercial property or strata assets should pay close attention here.

These clarifications may feel technical, but lenders interpret them through a practical lens, often tightening their documentation checklists as a result.

Clarification of arm’s-length terms for SMSF property loans

Arm’s-length terms remain the backbone of LRBA compliance. While the framework is unchanged, the ATO’s recent messaging has tightened expectations around evidence, consistency and transparency.

Key areas the ATO monitors closely:

• Interest rates must reflect the current commercial market.
• Some lenders require LVRs to be appropriate for the asset and borrowing environment, which can vary. Other lenders may have a lower maximum LVR for specific commercial assets compared to residential.
• Repayment schedules must look like genuine borrowing.
• Fees and charges must align with what a bank would typically charge.
• Security must be limited strictly to the LRBA asset.

What this means in practice

Lenders usually benchmark SMSF loans against their own specialist lending standards. For unrelated bank loans, the terms are considered arm’s-length by default. The Safe Harbour terms (PCG 2016/5) are a reference point only for related-party LRBAs to avoid NALI.

Lenders have different policies and documentation requirements. We typically see some lenders request the following, while other lenders may have different requirements:

• Some lenders require recent rental appraisals
• Other lenders may request an independent valuation only in specific circumstances, such as for commercial property or high LVRs
• Some lenders require audited financial statements, while others may accept a fund’s SMSF Annual Return
• Explanations for any past contribution patterns
• Details of previous LRBA terms for refinances
  

The closer your loan structure follows commercial conditions, the more predictable the assessment process becomes.

ATO focus on refinancing and loan variations

The ATO has sharpened its view on SMSF loan refinancing and loan changes because these events can alter the nature of the borrowing.

Issues the ATO frequently flags:

• Turning interest-only repayments into principal and interest without commercial reasoning
• Extending loan terms beyond typical commercial limits
• Capitalising interest when the SMSF had sufficient cash
• Increasing loan amounts in ways that may suggest new borrowing
• Changing the asset securing the loan
  

How lenders are responding

It is common for some lenders to ask for:

• Some lenders request complete LRBA loan histories, while others only require the last 12 months of statements
• Trustee minutes documenting reasons for the refinance
• Confirmation of rental income stability
• Updated bare trust reviews
• Evidence that the structure still qualifies as a “single acquirable asset”
  

Refinancing can still be achievable, but it may require more preparation and more documentation than in previous years.

What the ATO says about repairs, maintenance and improvements under an LRBA

This area often creates confusion because the definitions are nuanced.

Repairs and maintenance

These restore the asset to its original condition.

Borrowed funds may be used for:

• Fixing structural damage
• Repainting
• Replacing like-for-like items
• Restoring deteriorated features
  

Improvements

These change the asset or upgrade it beyond its original state.

Borrowed funds cannot be used for:

• Adding new rooms or extensions
• Building additional structures
• Major upgrades that enhance value
• Changing residential zoning to commercial
  

Why this distinction matters

Trustees sometimes assume they can fund improvements because the property is already under a loan. The ATO has made clear that this is not the case.

Lenders also take notice, because significant improvements may alter the security value or the nature of the LRBA asset.

Contributions, drawdowns and their interaction with LRBA rules

The ATO has recently clarified the relationship between contributions and the cash flow of an LRBA.

Important reminders for trustees:

• Contributions must stay within annual caps.
• Contributions cannot be used in ways that mask loan distress.
• Drawdowns must relate to the original purpose of the loan.
• Contributions that appear “artificially timed” may attract ATO attention.
  

From a lending perspective

Some SMSF lenders now ask for:

• Contribution summaries
• Trustee confirmation of expected future contributions
• Rental income forecasts
• Fund liquidity statements
  

These help lenders understand how the SMSF intends to service the LRBA sustainably.

NALI and NALE risks linked to SMSF loan arrangements

Non-arm’s length income (NALI) remains one of the most significant SMSF tax risks. The ATO’s message has been consistent: if the terms don’t look commercial, the income may be taxed at the highest marginal rate.

For related-party loans that do not meet the ATO’s Safe Harbour terms (PCG 2016/5), the income from the asset may be treated as NALI and taxed at the highest marginal rate (for example 45% plus applicable levies), which could affect all fund income associated with the arrangement depending on the circumstances. Trustees should seek independent professional advice before entering or maintaining these arrangements.

NALI may apply when:

• The interest rate is discounted
• Repayments are deferred without reason
• The LVR is unusually high for the asset type
• Related parties provide services for free or below market cost
• The asset produces income inconsistent with the LRBA terms
  

Why this matters for trustees

NALI doesn’t just affect the income from the specific asset.

Depending on the circumstances, it may affect all fund income related to that arrangement. The tax impact can be significant if not addressed early.

This is one reason many lenders look for clear, consistent documentation for SMSF loans, as robust records can help reduce the risk of NALI concerns arising.

Documentation, valuations and evidence the ATO expects

If there is one theme the ATO continues to reinforce, it’s documentation.

Trustees should prepare and maintain:

• A trust deed that permits borrowing
• An investment strategy that acknowledges LRBA risk
• A compliant holding trust deed
• Commercial loan documentation
• Independent property valuations
• Consistent rental appraisals
• Cash flow evidence
• Repayment histories
• Trustee meeting minutes
• Service provider invoices
• Asset segregation records
  

How lenders apply these expectations

Lenders are not responsible for SMSF compliance, but they often mirror ATO expectations to reduce structural risks. That means trustees may need to prepare documentation earlier, and in more detail, than with a standard investment loan.

Practical implications for SMSF trustees preparing to borrow

Putting the ATO’s current stance into practical terms:

1. Plan documentation early

Bare trust setup, valuations and legal reviews should begin well before a purchase contract is signed.

2. Expect slower processing compared to personal loans

SMSF lending involves more compliance checks, even when the borrowing is straightforward.

3. Understand your fund’s cash flow thoroughly

Lenders may apply different buffers or serviceability methods because super income behaves differently from employment income.

4. Maintain liquidity for improvements and operating expenses

Borrowed funds cannot be used for significant improvements, so the fund needs cash reserves to manage foreseeable property expenses.

5. Prepare for refinancing ahead of time

Trustees may want to avoid waiting until the final year of the loan term, as SMSF loan refinancing documentation can take longer than expected to prepare and assess.

How we support SMSF trustees through the lending process

While we cannot give tax or legal advice, we can help you navigate lender expectations in a structured, transparent way as local mortgage brokers in the Sunshine Coast who regularly deal with SMSF lending policies.

We assist by:

• Comparing SMSF lender policies
• Outlining documentation each lender may require
• Coordinating timelines with your accountant and solicitor
• Helping you prepare for valuation, trust setup and settlement
• Clarifying what lenders may consider for serviceability and risk
• Supporting refinances or loan variations in line with commercial expectations
  

Our role is to help you understand the lending landscape so you can make informed decisions with your professional advisers.

Key points trustees should keep in mind

If you’re considering an SMSF property loan, the recent ATO rulings and guidance highlight a clear theme:

SMSF borrowing is still available, but it must look and operate like a commercial arrangement from day one.

Key takeaways:

• ATO guidance has strengthened expectations around arm’s-length evidence.
• Refinancing and loan variations may attract more scrutiny than before.
• Improvements must be funded from SMSF resources, not borrowed money.
• Contribution patterns and fund liquidity are becoming more relevant to lenders.
• Strong documentation is essential at every stage of the LRBA.
  

With clearer ATO messaging and tightened lender processes, trustees who prepare early and document thoroughly may be better positioned to borrow with greater confidence and support ongoing compliance over the long term.

If you’d like to explore what SMSF lending options may be available for your situation, our brokers at Ausfirst Lending Group can help you understand different lender policies and discuss the next steps with your professional advisers.

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