Limited Recourse Borrowing Arrangements (LRBA) in SMSFs

Borrowing within a Self-Managed Super Fund (SMSF) is an area that attracts significant attention from trustees and investors alike. While superannuation laws generally restrict SMSFs from borrowing money, there are limited exceptions that allow borrowing in carefully regulated circumstances.

One of the most important borrowing exceptions available to SMSFs is the Limited Recourse Borrowing Arrangement (LRBA). Since their introduction, LRBAs have enabled SMSFs to acquire certain investment assets using borrowed funds, subject to strict compliance requirements.

Although borrowing can provide additional investment opportunities for SMSFs, LRBAs are highly regulated and involve considerable legal, taxation, banking, and compliance obligations. Trustees must understand the rules carefully, as incorrect structures or non-compliant arrangements can create serious consequences for the SMSF.

General Borrowing Restrictions in SMSFs

Under Australian superannuation law, SMSFs are generally prohibited from borrowing money. The purpose of this restriction is to protect retirement savings from excessive financial risk.

In simple terms, an SMSF cannot normally take on debt in the same way that individuals or businesses might.

Even temporary negative bank balances can potentially be treated as borrowings.

For example, if an SMSF issues a cheque or payment without sufficient funds available in the account, resulting in a bank overdraft, this may be considered a borrowing under superannuation law.

However, not every financial obligation is treated as borrowing. Certain investment arrangements, such as contracts for difference involving margin calls, may not necessarily constitute borrowing because money is not actually being loaned to the SMSF.

Because borrowing rules are strict, trustees must carefully monitor the fund’s cash flow and banking arrangements at all times.

Limited Exceptions to Borrowing

Superannuation law provides a few narrow exceptions that allow SMSFs to borrow temporarily in limited situations.

These include temporary borrowing:

• To pay certain member benefits
• To settle securities transactions
• Through a complying Limited Recourse Borrowing Arrangement

The temporary borrowing exceptions are very restricted and usually short-term in nature.

For example, an SMSF may temporarily borrow for up to 90 days to make certain benefit payments where sufficient cash is unavailable. Similarly, short-term borrowing may be permitted for settling investment transactions under strict conditions.

However, the borrowing arrangement most commonly discussed in SMSFs is the LRBA.

What Is an LRBA?

A Limited Recourse Borrowing Arrangement allows an SMSF to borrow money to acquire a permitted investment asset while limiting the lender’s rights to that particular asset.

This means that if the SMSF defaults on the loan, the lender’s recovery rights are generally restricted to the asset purchased under the borrowing arrangement. Other assets of the SMSF are generally protected.

LRBAs became formally recognised under superannuation law from 2007 and were further refined through legislative changes in 2010.

Since then, LRBAs have become widely used for purchasing assets such as:

• Residential property
• Commercial property
• Listed shares
• Listed units

The borrowed funds are used to acquire a specific asset that the SMSF is otherwise allowed to own directly.

Importantly, the arrangement must comply with strict legislative requirements throughout the life of the loan.

How an LRBA Works

Under an LRBA, the asset purchased with borrowed funds cannot usually be held directly by the SMSF trustee until the loan is fully repaid.

Instead, the asset is held through a separate holding trust structure while the SMSF receives the beneficial interest in the asset.

The SMSF:

• Receives the rental income or investment returns
• Bears the risks and benefits of ownership
• Has the right to eventually obtain legal ownership once the loan is repaid

The holding trust temporarily holds legal title to the asset until the borrowing arrangement ends.

This structure is one of the most important compliance features of an LRBA.

The “Limited Recourse” Feature

The “limited recourse” nature of the loan is critical.

In a standard loan arrangement outside superannuation, lenders may have broad rights to pursue other assets if a borrower defaults.

Under a complying LRBA, the lender’s rights are generally limited to the asset acquired under the borrowing arrangement.

For example, if an SMSF purchases an investment property under an LRBA and defaults on repayments, the lender can usually only recover against that property — not against other investments held by the SMSF.

This limitation is designed to protect the broader retirement savings of the fund.

Bank and Lender Involvement

In most SMSF LRBAs, the lender is a bank, financial institution, or commercial lender.

Lenders offering SMSF loans usually apply specialised lending criteria because SMSF borrowing structures differ from ordinary personal or business loans.

Banks and lenders typically assess:

• The SMSF’s financial position
• Contribution history
• Fund liquidity
• Rental income projections
• Loan servicing capacity
• Trustee structure
• Investment strategy compliance

SMSF lending policies are often more conservative than ordinary property lending.

In many cases, SMSF loans require:

• Higher deposits
• Larger cash reserves
• Lower loan-to-value ratios
• Additional legal documentation

Because SMSF lending is specialised, not all lenders offer LRBA products.

Offset Accounts and SMSF Loans

Some banks may offer offset account facilities linked to SMSF LRBA loans.

Where the offset account is provided through an Authorised Deposit-taking Institution (ADI), these arrangements are generally acceptable.

An offset account can reduce the interest payable on the loan while allowing the SMSF to retain liquidity.

However, trustees should exercise caution with offset-style arrangements offered by non-bank lenders, as the compliance treatment may differ.

The Importance of the SMSF Trust Deed

Before entering into an LRBA, trustees must ensure the SMSF trust deed permits borrowing.

Some older trust deeds may not adequately allow for LRBA structures.

Trustees should ensure the deed properly supports:

• Borrowing arrangements
• Property ownership structures
• Holding trust arrangements
• Trustee powers

Failing to review the trust deed can create significant compliance problems later.

The Single Acquirable Asset Rule

One of the most important LRBA rules is that the borrowing must relate to a “single acquirable asset.”

In simple terms, the loan arrangement must generally relate to one identifiable asset.

For property investments, this usually means a single property title.

For share investments, identical shares acquired together may sometimes be treated as a single asset.

However, different assets usually require separate borrowing arrangements.

For example:

• A parcel of identical listed shares may qualify as one asset
• Different classes of shares may require separate arrangements
• Two separate properties on different titles may not qualify as one asset

Determining whether an asset qualifies as a single acquirable asset can sometimes become legally complex.

What Assets Can Be Purchased?

An SMSF can only acquire assets under an LRBA if the SMSF could otherwise legally own the asset directly.

This means the investment must still comply with all normal SMSF investment rules.

Assets commonly acquired through LRBAs include:

• Residential investment properties
• Commercial properties
• Listed shares
• Listed managed funds

The investment must also comply with:

• The sole purpose test
• Investment strategy requirements
• Arm’s length rules
• Related-party acquisition restrictions

Repairs, Maintenance and Improvements

A common area of confusion in LRBAs involves repairs and property improvements.

Borrowed funds can generally be used for repairs and maintenance if allowed under the original loan terms.

Repairs may include restoring the asset to its original condition.

Maintenance may involve work that prevents deterioration of the asset.

However, borrowed money generally cannot be used to improve the asset.

This distinction is extremely important.

An improvement typically involves substantially enhancing the property or changing its character.

For example:

• Replacing broken roof tiles may be considered repairs
• Repainting may be maintenance
• Adding a new bedroom may be an improvement
• Constructing a swimming pool may be an improvement

Improvements may still be possible using the SMSF’s own available funds, but not borrowed LRBA funds.

Trustees must also ensure improvements do not fundamentally change the nature of the asset while the LRBA remains in place.

Redraw Facilities

Some LRBA loans may include redraw facilities from the outset.

Where properly structured, redraws may sometimes be used for repairs and maintenance purposes.

However, redraw facilities generally cannot later be added to the loan if they were not part of the original arrangement.

Again, borrowed redraw amounts cannot be used for improvements.

Holding Trust Structure

An LRBA requires a separate holding trust structure.

This holding trust temporarily holds legal ownership of the asset while the SMSF retains beneficial ownership.

The holding trustee cannot be identical to the SMSF trustee structure.

The holding trust exists purely for the borrowing arrangement and generally has limited activities.

Although the structure may appear complicated, it is a fundamental compliance requirement under Australian superannuation law.

Sale of the Asset

If the asset subject to the LRBA is sold, the loan generally must be repaid.

The borrowing arrangement cannot simply continue and be transferred to another unrelated asset.

This is because the loan relates specifically to the original single acquirable asset.

Refinancing an LRBA

Refinancing may be permitted under certain circumstances, provided the arrangement remains compliant with superannuation law.

However, refinancing can become technically complex and requires careful structuring.

Trustees should ensure any refinancing arrangement remains fully compliant with current LRBA requirements.

Compliance Risks and ATO Scrutiny

LRBAs remain an area of ongoing regulatory focus for the Australian Taxation Office (ATO).

Although regulators have noted that LRBAs do not currently pose a major systemic risk to the financial system, they are still considered a significant risk area for some SMSF members.

The ATO closely monitors borrowing arrangements to ensure they operate on proper commercial terms.

Trustees must ensure:

• Loan terms are commercially reasonable
• Repayments are made properly
• Documentation is maintained
• Assets are correctly structured
• Compliance obligations are continuously met

Poorly structured arrangements can potentially trigger taxation and compliance consequences.

Arm’s Length Requirements

All SMSF investments and transactions must operate on arm’s length terms.

This means the LRBA should resemble a genuine commercial loan arrangement that an independent lender would offer.

The ATO has issued guidance outlining what may be considered acceptable commercial terms in certain situations.

Even where commercial lenders are involved, trustees should still ensure the loan terms are appropriate and properly documented.

Ongoing Administration Responsibilities

Managing an LRBA involves substantial ongoing administration.

Trustees may need to manage:

• Loan repayments
• Interest expenses
• Annual property expenses
• Insurance
• Valuations
• Audit documentation
• Holding trust administration
• Financial reporting

Because of the complexity involved, many SMSF trustees engage specialist accountants, advisers, and legal professionals to assist with administration and compliance.

Other Important SMSF Rules Still Apply

Entering into an LRBA does not override other SMSF obligations.

Trustees must still comply with:

• The sole purpose test
• Investment strategy requirements
• In-house asset rules
• Related-party transaction restrictions
• Arm’s length dealing rules
• Asset valuation requirements
• Record keeping obligations

An LRBA must operate within the broader framework of Australian superannuation law.

Why Professional Guidance Matters

LRBAs can provide investment flexibility for SMSFs, but they are among the most technically complex areas of superannuation law.

Incorrect structuring, documentation issues, or non-compliant loan arrangements can result in significant tax and compliance problems.

Professional assistance is often required to help trustees manage:

• Loan structures
• Legal documentation
• Holding trust arrangements
• Compliance obligations
• Tax reporting
• Ongoing administration

Because each SMSF’s circumstances differ, careful consideration is essential before entering into any borrowing arrangement.

Disclaimer

The information provided on this website is general in nature and does not constitute financial, legal, taxation, or lending advice. We do not provide financial product advice or recommendations regarding borrowing through an SMSF. Trustees should seek independent advice from appropriately qualified financial advisers, legal advisers, taxation professionals, and lending specialists before establishing or entering into any Limited Recourse Borrowing Arrangement.