SMSF Related-Party Transactions: Lessons from Kevin’s Case

Kevin had just turned 21. Having worked from a young age, he was eager to purchase his first home, but his savings were not enough to meet the deposit requirements. Knowing the family’s SMSF had a healthy balance, he asked his mother whether he could borrow money from the fund — and whether the SMSF could be used as security for his bank loan.

Julie, a director of the fund’s corporate trustee, naturally wanted to support her son. However, both requests were strictly prohibited under superannuation law.

This simple scenario, drawn from the ATO’s own guidance, illustrates one of the most common compliance traps in the SMSF sector: well-intentioned trustees unintentionally breaching the rules governing related-party transactions.

Superannuation law requires all SMSF transactions to satisfy the sole purpose test under s62 of the Superannuation Industry (Supervision) Act 1993 (SISA). The fund must operate exclusively to provide retirement benefits. Accordingly, no trustee, member, or relative may receive an immediate or present-day benefit from the SMSF.

Transactions that are strictly prohibited

1. Loans and financial assistance (SISA s65)

SMSFs must not:

• Lend money to members or their relatives, or

• Provide financial assistance to them in any form.

  
  

Examples from the above scenario:

• Kevin (the son) borrowing from the SMSF → strictly prohibited.

• Using the SMSF’s assets as security for his home loan → prohibited.

  
  

2. Present-Day Benefit - Transactions With Related Parties Must Be Commercial

A member or related party cannot use or personally benefit from SMSF assets — this breaches the sole purpose test under s62. Where transactions with related parties are permitted, they must:

• Occur at arm’s length (SISA s109), and

• Be supported by robust market-value evidence.

  
  

However, it is important to note that most transactions involving residential property are not permitted at all, even if undertaken at market value. For example, if Julie tried a different approach and attempted to sell the SMSF’s residential property to Kevin — at any price — the transaction would still be prohibited under s66 because SMSFs cannot sell residential property to members or related parties.

Only Business Real Property (BRP) may be sold to a related party, and even then, the sale must occur on fully commercial terms and be supported by independent valuation.

3. In-House Assets – Capped at 5%

What if Julie decided to take a different approach and let her son Kevin live in the SMSF’s residential property, paying market rent like any other tenant? It may appear commercially reasonable — Kevin gains affordable accommodation and the SMSF receives rental income.

However, under superannuation law this arrangement is not permitted, regardless of the rent being at market value.

Under SISA Part 8, in-house assets include:

• Loans to related parties

• Investments in related parties

• Leases involving related parties

  
  

The law imposes a strict 5% cap on in-house assets. But importantly:

Residential property cannot be leased to a member or relative at all, even within the 5% threshold. It is treated as a prohibited acquisition/use because it provides a present-day benefit and breaches s62 (sole purpose test) and s66 (acquisition and use of assets by related parties).

Leasing residential property to a related party is always a breach — the value of the asset simply does not matter. Only Business Real Property (BRP) may be leased to a related party, and only on fully commercial terms.

4. SMSF Acquisition From Related Parties (SISA s66)

SMSFs cannot acquire assets from related parties unless the asset is:

• Business Real Property (BRP) used wholly and exclusively in a business, or

• Listed securities (e.g., ASX-listed shares).

  
  

5. Collectables and Personal-Use Assets (SISR 13.18AA)

Seeing the sharp rise in gold prices, Julie considered purchasing gold jewellery through her SMSF. She imagined it would work perfectly — she could enjoy wearing the jewellery at events while the SMSF benefited from the capital growth.

However, under the ATO’s rules, this is strictly prohibited. SMSF-owned jewellery cannot be worn, displayed, stored at home, or used personally in any way. If the SMSF acquires jewellery or other collectables, Julie must arrange for the items to be stored in an independent, secure facility such as a bank’s safe custody service, and must obtain regular valuations.

The law is clear. For collectables and personal-use assets (including artwork, jewellery, wine, antiques, and similar items):

• Related parties cannot store, use, or lease these assets.

• They must be kept in an independent, secure facility.

• Insurance and documentation must be maintained at the SMSF’s expense.

  
  

6. Practical Guidance for Trustees

Due to the strict compliance environment, many trustees choose to avoid related-party transactions entirely to minimise:

• Sole purpose test breaches

• Market-value disputes

• Auditor contravention reports (ACRs)

• Severe tax consequences (potentially non-complying fund status)

  
  

Professional SMSF advice is recommended prior to any related-party dealing.

Quick Reference Table

Transaction Type	Permitted?	Key Rule / Notes
Loans to members/relatives	❌ No	SISA s65
Using SMSF assets as collateral	❌ No	Sole purpose test
Selling SMSF assets to related party	❌ No (except Business Real Property (BRP) at market value only)	SISA s66 & s109
Acquiring assets from related party	❌ No (except BRP or listed securities)	SISA s66
Leasing SMSF assets to related party	❌ No (except BRP on full commercial terms)	SISA Part 8
In-house assets	✔ Limited to 5% of total assets	SISA Part 8
Storage/use of collectables by related party	❌ No	SISR 13.18AA
Use of SMSF residential property by any related party	❌ No	Sole purpose test, s65, s66

 Important Note:  The 5% in-house asset cap does not apply to SMSF residential property. An SMSF can never lease, allow occupation, or permit any related party to use residential property under any circumstances — even if the rent is commercial or the value is under 5%. Residential property use by related parties is always prohibited under s62 (sole purpose), s65 (financial assistance), and s66 (related-party acquisition/use rules). Only Business Real Property (BRP) may be transferred or leased to related parties, and only on fully commercial terms.

Conclusion and Professional Opinion

Related-party transactions remain one of the most common areas where SMSFs get into difficulty. In practice, any arrangement that provides a present-day benefit, even indirectly, is likely to breach the law.

A conservative approach — avoiding related-party transactions unless clearly permitted — significantly reduces compliance risk for trustees.