SMSFs are generally prohibited from borrowing money under the Superannuation Industry (Supervision) Act 1993, but there is a key exception called a Limited Recourse Borrowing Arrangement (LRBA). An LRBA allows an SMSF trustee to borrow money to acquire an asset (like property) while limiting the lender’s recourse to that single asset.
According to statistics released by the Australian Taxation Office, property remains one of the largest asset classes held by SMSFs, representing roughly 15–20% of total SMSF assets in recent years. A significant portion of these property investments are acquired using Limited Recourse Borrowing Arrangements, highlighting how common this structure has become among trustees seeking long-term capital growth and rental income. However, borrowing also increases financial risk, which is why regulators impose strict compliance rules.
To see how LRBAs fit into a full SMSF investment strategy, including practical examples, check out this guide.
What Is an LRBA?
An LRBA is a specialized loan structure where borrowed funds are used to acquire a single acquirable asset that is held in a separate holding trust for the SMSF. The SMSF trustee has a beneficial interest in the asset and the right to legal ownership once the loan is repaid.
This borrowing structure is specifically permitted under the Superannuation Industry (Supervision) Act 1993, sections 67A and 67B, which outline the legal requirements for limited recourse borrowing. If these rules are not followed precisely, the arrangement may be deemed non-compliant, potentially exposing trustees to penalties and making the loan unenforceable.
- The lender’s recourse is limited to the asset held in the trust, protecting the rest of the SMSF’s assets.
- Current super law requires LRBAs to meet strict conditions to remain compliant.
Key LRBA Features
Borrowed funds can only be used to:
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Acquire a single acquirable asset (e.g., one property), not multiple unrelated assets
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Pay associated acquisition costs, such as stamp duty, legal fees, conveyancing, and establishment fees
Borrowed funds cannot be used to:
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Improve or significantly develop an existing property already owned by the SMSF (e.g., building a house on vacant land the SMSF already holds)
-
Fund renovations or capital improvements that change the character of the asset
Legal ownership and trust structure:
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The asset is held in a separate holding trust (commonly called a bare trust) while the loan is outstanding
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The SMSF holds the beneficial interest in the asset during the loan term
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Once the loan is fully repaid, legal ownership transfers to the SMSF trustee
Why trustees use LRBAs
Many SMSFs use LRBAs to gain earlier access to higher-value property that would otherwise take years of contributions to purchase outright. Rental income from the property can help service loan repayments, while any capital growth benefits the fund’s retirement savings. This strategy can improve diversification, particularly for funds heavily invested in shares or cash.
LRBA vs Traditional SMSF Property: Key Differences
|
Feature |
LRBA (SMSF Borrowing) | Standard SMSF Property Purchase (No Borrowing) |
|
Ability to Borrow |
Yes, via LRBA |
No, borrowing not allowed |
|
Loan Repayment Obligations |
Must be serviced from fund cash flow |
No loan repayments |
|
Asset Ownership |
Held in a holding (bare) trust until fully paid |
SMSF holds directly |
| Flexibility | Can leverage larger property |
Limited by fund balance |
Compared with standard home loans, SMSF loans generally carry higher interest rates, lower loan-to-value ratios (often 60–80%), and additional legal and setup costs due to the holding trust structure. Trustees should factor in establishment expenses, ongoing accounting, and legal compliance costs when assessing whether borrowing is financially viable for the fund.
Practical Considerations and Risks
- Loan terms and servicing: SMSF loans often have stricter terms and higher interest rates.
- Loan recourse: Lenders can only claim the property under default — they cannot pursue other SMSF assets.
- Compliance documentation: Proper trust deeds and loan contracts must reflect LMSA requirements.
- Market risk: Property values and rental income can fluctuate, and the SMSF must still meet loan repayments even during vacancies or downturns, which may strain the fund’s liquidity.
Trustee Insights
- Always structure the LRBA so it meets ATO requirements to avoid sanctions.
- Engage professionals (accountants, lawyers, and brokers) before entering an LRBA.
- Ensure the fund’s investment strategy supports borrowing and property acquisition.
Because LRBAs involve legal, tax, and financial complexities, they are generally more suitable for larger SMSFs with stable cash flow and long investment horizons. Trustees should regularly review their investment strategy to ensure borrowing remains aligned with retirement objectives and risk tolerance.
Frequently Asked Questions (FAQs)
- Can borrowed funds be used for renovations?
No — LRBAs cannot be used to make capital improvements to the property. - Does the SMSF own the property straight away?
Not legally — the SMSF holds a beneficial interest while the holding trust owns legal title until the loan is repaid.
Get in touch with us to discuss how to structure an LRBA for your SMSF and explore the best options for your situation.
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