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When borrowing inside a Self Managed Superannuation Fund (SMSF) can I borrow from a related party?

The short answer is yes you can. However, care must be taken to adhere to Section 109 of the Superannuation Industry Supervision Act (SISA) 1993. This basically states that a trustee can only invest and deal on an arm's length basis.  If the transaction is deemed not to be at arm's length the terms and conditions of the dealings must be no more favourable to the other party than those which it is reasonable to expect would apply if the dealings / transactions were on arm's length terms.

It's possible for a related party to provide for a transaction that is more favourable for the SMSF as this is not forbidden under Section 109. The Australian Taxation Office (ATO) Interpretive Decision (ID) 2010/162, reinforces this stating that there will be no contraventions of the governing laws and regulations, if the terms of the transaction are more favourable to the SMSF.

However, the portion of the transaction that is deemed to be 'more favourable? would be deemed as a contribution to the SMSF by the related party, i.e., non-concessional (members) contribution.  This is confirmed by Taxation Ruling (TR) 2010/1 which states that more favourable terms would give rise to a contribution.