A turbulent history: SMSF lending turns 18

In September 2007, amendments to the Superannuation Industry (Supervision) Act 1993 (SISA) came into force, giving the green light to Limited Recourse Borrowing Arrangements (LRBAs) for self-managed super funds (SMSFs).

Following implementation of the amendments, SMSFs could now borrow money to acquire an asset (such as property), provided the borrowing was structured as a limited recourse loan.

Eighteen years on from these changes, SMSF lending has a firm foothold as a mainstream wealth-creation strategy, forming a core offering for thousands of mortgage brokers and alternative lenders.

Today’s SMSF sector is massive, yet it continues to grow. According to the Australian Taxation Office (ATO), there were over 653,000 SMSF funds comprising 1.2 million members holding over one trillion dollars in assets.

According to Bluestone Home Loans, SMSF lending has made up around 7% of these assets since 2019.

Yet SMSF lending has had a turbulent history and its future was not always guaranteed.

Looking back on 18 years of SMSF lending, Bluestone’s head of specialised distribution and SMSF fanatic Richard Chesworth (pictured) recalled the landmark moments of this hugely popular – yet sometimes misunderstood – product.

September 2007: SISA comes into effect, allowing LRBAs for SMSFs, to mixed opinions

“Like anything new to market, there was a level of uncertainty about what was possible, and the costs were often exorbitant,” said Chesworth.

There was also confusion around the initial laws when they were introduced in September 2007, leading to further revision in July 2010 under SISA Section 67A.

Early adopters, according to Chesworth, were drawn to SMSF lending “because it gave them a sense of control and the ability to borrow was hard to ignore".

But it wasn’t all smooth sailing – it came with a lot of complexity around setting up and running the structures, as well as confusion around what assets trustees were and were not allowed to borrow for.

“That push-pull, between the freedom and potential upside on one hand, and the responsibility and risk on the other, is what created the mixed feelings we saw in those early days, and it still shapes the conversation today,” said Chesworth.

December 2014: SMSF lending faces a near-death moment

The David Murray-chaired Financial System Inquiry nearly delivered a fatal blow to the SMSF lending market.

Recommendation 8 of the report stated: “Government should restore the general prohibition on direct borrowing by superannuation funds by removing Section 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act) on a prospective basis.”

To justify the recommendation, the report said it would “prevent the unnecessary build-up of risk in the superannuation system and the financial system more broadly”.

Echoing criticisms still being voiced today, restoring the prohibition would also “fulfil the objective for superannuation to be a savings vehicle for retirement income, rather than a broader wealth management vehicle”.

This recommendation ultimately failed. Chesworth recalled: “When the government looked into it, there just wasn’t enough evidence to justify such a big intervention.

“So instead of banning LRBAs outright, they asked the Council of Financial Regulators and the ATO to keep a close eye on things. Over time, the CFR’s own reports didn’t find any real system-wide risks, which is a big reason why LRBAs are still allowed today.”

2015-2022: SMSF lending remains under the microscope

The Council of Financial Regulators (CoFRs) continued to keep a close eye on the SMSF lending market over the years as it became further ingrained into the mainstream.

Regulatory concerns persist to this day, such as:

• Concentration and liquidity: The risk of too much exposure to a single asset (usually property) and limited liquidity for benefit payments

• Governance and advice quality: As the vehicle is not covered by the Australian Prudential Regulation Authority (APRA), SMSF trustee must have a deep understanding of risks and duties 

• Valuation: Lack of clarity over market value of assets held in an SMSF

• Related-party rules: All transactions between an SMSF and a related party must be conducted on an arm’s length basis – that is, on commercial terms as if dealing with an unrelated third party. These rules are designed to ensure that SMSFs are used solely for retirement savings and not for providing financial benefits to members or their associates before retirement

There are also many hidden costs associated with SMSF investing, including auditing, taxation, administration and legal.

SMSF lending in 2025

As a complex and potentially costly endeavour, SMSF investing does not suit everyone.

As Chesworth said: “SMSF investing has traditionally appealed to higher-income professionals and business owners, people who want more control, have larger balances, and are comfortable taking on the responsibilities that come with being a trustee.”

However, younger investors are also starting to enter the space, although “it still tends to work best for those with solid balances, steady surplus cash flow, and good specialist advice to guide them”, Chesworth added.

For Bluestone, SMSF lending has emerged as a core piece of its business.

“It’s a space we approach with experienced distribution partners and measured credit settings, things like the right LVRs, servicing guidelines reflective of the SMSF environment , and documentation that aligns with trustees’ obligations,” Chesworth said.

After a number of the major banks retreated from the SMSF market from 2018 onwards, non-bank lenders like Bluestone saw a lucrative avenue to expand.

“We can look at diverse income sources – like self-employed borrowers – and tailor the paperwork around LRBA structures,” Chesworth explained. “Big banks usually focus on standard, cookie-cutter profiles, so when it comes to SMSF loans that need a bit more flexibility, non-banks are often the better fit while still keeping things responsible and compliant.”

The Labor Government has a plan to double the rate of earnings tax – from 15% to 30% – for super balances over $3 million. While these changes could affect a small percentage of SMSF trustees, Chesworth does not believe they will have a sizeable impact on the SMSF lending space.

Read more: Dear SMSF investors, don't fear Labor's super tax bogeyman