Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 133

SMSFs can lend to some relatives

I have always found it odd that SMSF members can have their SMSF trustee provide financial assistance to the members’ cousins and former spouses, just not to other relatives. How is this possible?

Who is a relative?

It’s not clear if it was intended but there is a loophole in the superannuation law. The law prohibits SMSF members from providing financial assistance to members and relatives of the members of an SMSF. However, the definition of a ‘relative’ of a member of an SMSF is a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the individual or of his or her spouse; or, a spouse of the individual or of any other individual referred previously.

As examples, cousins and former spouses are not mentioned. Therefore, SMSF trustees can provide financial assistance to their cousins and former spouses as long as the terms of financial assistance are at arm’s length and in accordance with their SMSF’s investment strategy. This means the loan should be documented so that it is enforceable by the SMSF trustees should there be a problem and interest at the market rate must be charged on the loan.

You may think that cousins and former spouses are included in the definition of a related party somewhere under the superannuation law. In fact, they are. Cousins and former spouses are included in the section which outlines who an individual can establish an SMSF with. This area of the law states that you can establish an SMSF with a relative. Here, the definition of a ‘relative’ of an SMSF member is a parent, child, grandparent, grandchild, sibling, aunt, uncle, great-aunt, great-uncle, niece, nephew, first cousin or second cousin of the individual or of his or her spouse or former spouse; or, a spouse or former spouse of the individual, or of an individual referred to previously.

As long as none of the members of an SMSF is a child of a cousin or of a former spouse; and, none of the other members of the SMSF is directly related to the cousins such as being the spouse of the cousin or being a parent of the cousins, the SMSF would not be prohibited from providing financial assistance to these people. Otherwise they will fall within the parameters of being a ‘relative’ due to the parent relationship or spousal relationship existing between the two parties.

Always check the related party rules

I love working with the superannuation law, but when an important defining term can include one relationship under one area of the law and exclude it in another, I can understand why many people find it frustrating. These inconsistencies seem odd, and it does make understanding tricky for the average SMSF investor. The important thing to remember here is that it’s always best to talk to an SMSF specialist before proceeding with any related party transactions.

 

Monica Rule is an SMSF specialist and author, see www.monicarule.com.au.

 

  •   6 November 2015
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Ensure death benefit nominations are upheld

SMSFs need care dealing with related parties

Watch SMSF borrowing rules for separate assets

banner

Most viewed in recent weeks

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

The retirement scorecard: how many of these questions can you answer?

From the maths of retirement, estimating spending and picking the right asset allocation to survive a poor decade, here are the questions every retiree – current or future – should be able to answer for themselves.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Latest Updates

Testamentary trusts: Treasury has picked the wrong reading

A decades-old estate planning tool has survived one tax crackdown only to be caught by another. The surprise isn't who the reform is targeting, but who could end up paying the price for drafting choices made years ago.

Latest from Morningstar

Does an American retirement rule work for Australians?

The 4% rule has survived decades of scrutiny, but Australia's retirement system changes the equation in ways most overlook. Before accepting or rejecting this rule of thumb, it pays to understand what really drives retirement outcomes.

Shares

Glencore lands on the ASX. Should BHP and Rio shareholders switch?

A coal-heavy miner with governance concerns isn't the obvious choice for investors. Yet, Glencore's ASX listing may offer something BHP and Rio can't. The challenge is working out whether the opportunity outweighs the risks.

Why does the system treat capital gains and losses differently?

Investors are often told not to let tax policy drive their investment decisions. Yet, under the new CGT rules, portfolio construction, volatility and even how assets are owned may have an outsized impact on their final outcome.

Economy

Three common sense reforms that Australia needs

What do frozen bank accounts, mortgage traps and pension penalties have in common? They're all symptoms of a system that makes life much harder. Yet the obvious solutions seem to have escaped the attention of Canberra.

Shares

The hidden cost of government debt for investors

Some of the important effects of rising public debt never make the headlines. Research shows the immediate effects may already be unfolding, influencing corporate behaviour in ways that many investors would never suspect.

Investment strategies

When do fundamentals matter?

Is fundamental investing losing its grip on markets? Investors continue to search for valuation-based explanations for every price move, but the dominant force behind short-term returns may be something else altogether.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.