An LRBA, or Limited Recourse Borrowing Arrangement, is the only loan structure through which a self-managed super fund can borrow money to purchase an investment property. If you are considering SMSF property investment using borrowed funds, understanding how an LRBA works is essential before you proceed.
What Is a Limited Recourse Borrowing Arrangement?
A Limited Recourse Borrowing Arrangement is a specific loan structure authorised under Section 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act). It allows an SMSF to borrow money to acquire a single asset, with the lender’s recourse limited to that asset alone in the event of default.
The “limited recourse” element is fundamental. If your SMSF defaults on an LRBA loan, the lender cannot pursue the other assets held within your fund. They can only sell the specific asset purchased under the arrangement. This protection is one of the reasons LRBA lending carries higher interest rates and more stringent lender requirements than standard investment loans.
An LRBA can be used to purchase either residential property or commercial property, subject to the ATO’s property eligibility rules and the fund’s investment strategy.
The Role of the Bare Trust in an LRBA
An LRBA always involves a bare trust. This is not optional and is a structural requirement under the SIS Act.
The bare trust is a separate legal entity that holds legal title to the property during the period the LRBA loan is outstanding. The arrangement works as follows:
- The SMSF borrows money from an external lender under an LRBA.
- The property is purchased and registered in the name of a bare trustee, not the SMSF trustee.
- The SMSF holds the beneficial interest in the property throughout the loan term.
- Once the LRBA loan is fully repaid, legal title is transferred from the bare trustee to the SMSF trustee.
The bare trust is established specifically to hold a single acquirable asset. It cannot hold multiple properties and it cannot be modified to hold a different asset once established.
Establishing the bare trust correctly, before or at the time of settlement, is one of the most important steps in any LRBA purchase. If the bare trust deed is not in place at settlement, the entire structure may be non-compliant.
What Your SMSF Can and Cannot Do Under an LRBA
The SIS Act imposes specific restrictions on what an SMSF can do with a property held under an LRBA. These restrictions apply for as long as the loan remains outstanding.
What is permitted:
- Using borrowed funds to complete the property purchase.
- Using borrowed funds to cover acquisition costs including stamp duty, legal fees, and conveyancing.
- Carrying out repairs and maintenance to restore the property to its original condition.
- Receiving rental income from the property into the SMSF.
What is not permitted:
- Using borrowed funds to improve the property beyond its original condition.
- Borrowing against the same property a second time (no top-up loans or redraws once the LRBA is in place).
- Purchasing multiple properties under a single LRBA (one loan, one asset).
- Cross-collateralising the LRBA with other assets in the fund.
- Fund members or their relatives residing in a residential property held under the LRBA.
The distinction between a “repair” and an “improvement” is one that the ATO takes seriously. Replacing a damaged roof with equivalent materials is a repair. Adding a new deck or extending the property is an improvement and cannot be funded by the LRBA.
How Income and Costs Flow Through the LRBA
All income generated by the property, primarily rental income, flows directly into the SMSF’s bank account. Equally, all costs associated with the property, including loan repayments, rates, insurance, and property management fees, must be paid from the SMSF’s bank account.
Fund members cannot make personal contributions to the SMSF specifically to cover loan repayments. Contributions must be made through the standard contribution channels (concessional and non-concessional) and are subject to the applicable annual contribution caps.
This income and expense structure has meaningful tax implications. Rental income is taxed at 15% in the accumulation phase. If the property is sold while the fund is in pension phase, capital gains may be tax-free. Use our SMSF borrowing capacity calculator to model how rental income and member contributions affect your fund’s ability to service an LRBA.
Key ATO Compliance Requirements
The ATO monitors LRBA compliance closely. Trustees must ensure:
- The LRBA terms are at arm’s length and reflect market conditions.
- The property qualifies as a single acquirable asset under the SIS Act.
- The fund’s investment strategy explicitly addresses borrowing and property.
- The bare trust deed is properly executed and documented.
- Annual valuations of the property are obtained and recorded.
For related-party LRBAs, where a fund member or associated entity provides the loan to the SMSF rather than an external lender, the ATO publishes annual safe harbour interest rates. The LRBA must meet or exceed these rates to be treated as arm’s length. Refer to the ATO website for the current year’s safe harbour rate before entering a related-party arrangement.
If you are refinancing an existing LRBA, note that the ATO requires the refinanced loan to not increase the outstanding borrowing against the property. See our guide to SMSF loan refinancing for further detail.
Frequently Asked Questions
What does limited recourse mean in an SMSF loan?
Limited recourse means that if the SMSF defaults on the loan, the lender’s only remedy is to sell the property held in the bare trust. The lender cannot access other assets held in the SMSF, such as cash, shares, or other properties. This protects the fund’s broader asset base but increases the lender’s risk, which is reflected in higher SMSF loan interest rates. However, this personal guarantee will be requested from each member.
Can an SMSF borrow to improve a property it already owns?
No. Under the SIS Act, borrowed funds under an LRBA can only be used to acquire the property and cover acquisition costs. Once the property is purchased, it cannot be improved using borrowed funds. Improvements must be funded from the SMSF’s own cash reserves.
What is the bare trust in an SMSF loan?
The bare trust is a separate legal structure required under every LRBA. It holds legal title to the property on behalf of the SMSF while the loan is outstanding. The bare trustee is different from the SMSF trustee. Once the LRBA is repaid, legal title transfers from the bare trustee to the SMSF trustee.
Can I have more than one LRBA in my SMSF?
Yes. An SMSF can have multiple LRBAs provided each one relates to a separate single acquirable asset. Each LRBA requires its own bare trust arrangement. The fund’s serviceability, liquidity requirements, and investment strategy must support multiple borrowings.
Considering an LRBA purchase? SMSF Mecca Finance is accredited with the specialist non-bank lenders who offer LRBA products. We manage the full application process, from lender selection to bare trust coordination. Book a strategy call to get started.