What Is a Personal Guarantee for an SMSF Loan?
- Jaeneen Cunningham
- Jul 9
- 5 min read
Self-Managed Superannuation Funds (SMSFs) have become an increasingly popular way for Australians to take control of their retirement savings, particularly through direct investment in property. However, purchasing property through an SMSF is not as straightforward as buying in a personal capacity. Due to legislative restrictions, SMSFs must follow very specific rules when borrowing money to acquire assets. One critical requirement of SMSF lending is the use of a personal guarantee. This article explores what a personal guarantee is, why it’s required for SMSF loans, and how it is treated within the superannuation framework.
Understanding SMSF Borrowing Rules
Before diving into personal guarantees, it’s important to understand how borrowing works in an SMSF. Under section 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act), an SMSF is allowed to borrow money to acquire an asset only under a Limited Recourse Borrowing Arrangement (LRBA).
What is an LRBA?
An LRBA is a structure that allows an SMSF to borrow funds to acquire a single acquirable asset (or a collection of identical assets with the same market value), where:
The borrowed money is used to purchase a specific asset;
The asset is held in a separate holding trust until the loan is repaid;
The lender’s rights against the SMSF in the event of default are limited to the specific asset held in the holding trust.
This structure ensures that all other assets in the SMSF are protected from any liability arising from the borrowing.
Why Lenders Require Personal Guarantees
Because an LRBA limits the lender's recourse to just the asset purchased, this significantly increases the lender's risk. They cannot seize other assets within the SMSF to recover unpaid debts. To offset this risk, lenders almost always require a personal guarantee from the SMSF trustee or directors of the corporate trustee.
Definition of a Personal Guarantee
A personal guarantee is a legal commitment made by an individual — usually the trustee or directors of the trustee company — to personally repay the SMSF loan if the SMSF itself cannot meet its obligations.
This means if the SMSF defaults on the loan and the proceeds from selling the asset under the LRBA are insufficient, the lender can pursue the guarantor’s personal assets to recover the outstanding balance.
Key Reasons SMSF Loans Use Personal Guarantees
There are several interconnected legal and practical reasons personal guarantees are a standard feature of SMSF loans:
1. Limited Recourse Nature of the Loan
The SIS Act mandates that any borrowing by an SMSF must be under a limited recourse arrangement. This means the lender cannot pursue the SMSF’s other assets beyond the one acquired with the loan. As such, personal guarantees become the lender’s safety net to recover outstanding amounts outside the scope of the SMSF.
2. Assets Held in a Holding Trust
Under the LRBA structure, the property is not held directly by the SMSF but is instead held in a separate bare trust or holding trust until the loan is fully repaid. This extra legal layer can make recovery difficult for lenders, especially if the trust becomes insolvent. Personal guarantees provide a direct path to recovery.
3. Restrictions on Borrowing for Improvements
SMSFs may borrow funds to acquire an asset but not to improve or substantially change it. This means if the property’s value doesn’t increase as expected, and the SMSF fails to meet repayments, lenders face greater risk. Personal guarantees serve to balance this risk.
4. No Security Over Other Assets
SMSFs cannot offer any form of charge or encumbrance over other assets in the fund. This means a lender cannot take additional forms of collateral or mortgage from the SMSF. A personal guarantee, again, becomes a necessary alternative.
When Can a Lender Call Upon a Personal Guarantee?
A lender will only call on a personal guarantee in the event of default under the loan terms. Common triggers include:
Missed repayments;
Breach of loan covenants (e.g., not maintaining adequate insurance);
Bankruptcy or insolvency of the SMSF trustee;
Failure to refinance a balloon payment at the end of a loan term (if applicable).
Process of Enforcement
If default occurs, the lender must first attempt to recover the debt from the sale of the asset held in the holding trust. If the sale proceeds do not fully cover the debt, the lender can then legally pursue the individual(s) who provided the personal guarantee. This may involve:
Court action;
Bankruptcy proceedings;
Garnishment of wages or personal income;
Sale or repossession of the guarantor’s personal assets.
How Personal Guarantees Are Treated Under Superannuation Law
The Australian Taxation Office (ATO) has issued guidance around personal guarantees in the context of SMSFs. While permitted, there are strict conditions and limitations:
1. Guarantees Must Not Breach the Sole Purpose Test
The primary purpose of an SMSF must be to provide retirement benefits to members. A personal guarantee must be structured to support the fund's investment strategy and not to improperly enrich the trustee or any related party.
2. Guarantees Cannot Be Used to Inject Funds Improperly
Guarantors cannot directly repay the loan on behalf of the SMSF without breaching super contribution rules. If a guarantor pays out a debt after a default, the ATO may view it as a contribution, which could exceed contribution caps and lead to penalties.
3. Guarantees Do Not Give Ownership Rights
Providing a personal guarantee does not grant the guarantor ownership rights or any beneficial interest in the SMSF asset or the SMSF itself. The fund remains a separate legal entity with its own structure and regulations.
4. Guarantors Should Be Members or Related Parties
In most cases, personal guarantees are provided by members or directors of the corporate trustee. Third-party guarantees (e.g., from a friend or unrelated business partner) could create non-arm’s length issues, potentially breaching compliance requirements.
Risks and Considerations for Trustees
While personal guarantees allow SMSFs to access valuable borrowing arrangements, they also carry significant personal and financial risks. Trustees and directors should carefully weigh the following:
1. Personal Asset Exposure
If the SMSF defaults, your home, savings, and other personal assets could be at risk. It is critical to understand that lenders may enforce the personal guarantee just like any other debt.
2. Liability Even After Leaving the Fund
If you provided a personal guarantee while acting as a director or trustee, resigning from that position does not necessarily release you from the guarantee unless formally discharged by the lender.
3. Legal Advice Is Essential
Trustees should always obtain independent legal and financial advice before signing any guarantee. Understanding the scope of liability and potential consequences is vital.
Final Thoughts: Proceed with Caution and Advice
Personal guarantees are a standard part of SMSF borrowing under limited recourse arrangements — but they come with serious consequences if the SMSF fails to meet its obligations. While they provide peace of mind for lenders, they create a personal risk for trustees and directors of corporate trustees.
Before proceeding, SMSF members should ensure:
The investment aligns with the fund’s goals;
The risks are understood and manageable;
Independent legal and financial advice has been obtained.
Understanding how personal guarantees work in an SMSF loan structure is essential to making sound, compliant, and low-risk decisions that protect both your retirement wealth and your personal financial future.
Need Help with SMSF Lending or Risk Management?
Navigating the world of SMSF borrowing can be complex, especially with the added responsibility of personal guarantees. Speak with an experienced mortgage broker who understands LRBA structures and the compliance obligations of SMSFs. They can help structure your loan to reduce risk and ensure your fund stays within the law.
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