Related Party LRBA in SMSF 

A Self-Managed Super Fund (SMSF) is generally prohibited from borrowing money under Australian superannuation law. However, limited exceptions exist that allow borrowing in carefully regulated circumstances. One of the most commonly used exceptions is the Limited Recourse Borrowing Arrangement (LRBA).

While many SMSF borrowings are arranged through banks or commercial lenders, superannuation law also allows SMSFs to borrow from related parties, including fund members and related entities, provided strict conditions are met.

Related party LRBAs can offer flexibility for SMSF trustees, particularly where traditional finance is difficult to obtain. However, these arrangements are heavily scrutinised by the Australian Taxation Office (ATO) and must be structured carefully to avoid significant tax and compliance consequences.

Because related party borrowing sits at the intersection of superannuation law, taxation law, trust law, and lending principles, trustees must understand the rules in detail before entering into these arrangements.

Borrowing Restrictions in SMSFs

As a starting point, SMSFs are generally not allowed to borrow money.

The borrowing prohibition exists to protect retirement savings from excessive financial risk and leverage.

Even relatively simple situations can unintentionally result in a borrowing.

For example, if an SMSF writes a cheque or makes a payment without having sufficient funds available, resulting in a bank overdraft, the overdraft may be treated as a borrowing under superannuation law.

This demonstrates how broadly the borrowing rules can apply.

However, not every financial obligation is necessarily considered borrowing. Certain investment arrangements involving contractual obligations may not amount to borrowing if money has not actually been loaned to the SMSF.

Because of these strict rules, SMSF trustees must carefully manage the fund’s banking arrangements and liquidity position at all times.

Borrowing Exceptions

Despite the general prohibition, superannuation law provides several limited borrowing exceptions.

Temporary borrowing may be permitted in narrow situations, including:

• Paying member benefits
• Settling securities transactions
• Entering into a complying LRBA

The temporary borrowing exceptions are highly restricted and usually short term.

The most significant and widely used exception is the LRBA.

What Is a Related Party LRBA?

A related party LRBA occurs when an SMSF borrows money from a related party rather than a bank or commercial lender.

The related party lender may include:

• An SMSF member
• A relative of a member
• A company controlled by members
• A related trust or entity

The borrowing must still comply with all LRBA rules under superannuation legislation.

Importantly, the fact that the lender is related to the SMSF does not remove the requirement for the arrangement to operate on proper commercial terms.

The Meaning of “Limited Recourse”

Under an LRBA, the lender’s rights are limited to the specific asset purchased under the borrowing arrangement.

This means that if the SMSF defaults on the loan, the lender generally cannot access other SMSF assets beyond the acquired asset itself.

For example, if an SMSF uses a related party LRBA to purchase a commercial property, the lender’s recovery rights are usually restricted to that property only.

This limited recourse feature is a mandatory requirement under superannuation law.

How the LRBA Structure Works

Under an LRBA, the purchased asset cannot generally be held directly by the SMSF trustee while the loan remains outstanding.

Instead, a separate holding trust structure is established.

The holding trustee holds legal ownership of the asset while the SMSF retains beneficial ownership.

The SMSF receives:

• Rental income or investment returns
• The benefits of ownership
• The right to obtain legal ownership after repayment of the loan

The holding trust exists specifically for the LRBA arrangement.

Importantly, the trustee of the holding trust cannot be the same as the trustee of the SMSF.

The holding trust structure is one of the most critical compliance requirements for an LRBA.

Single Acquirable Asset Rule

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

In simple terms, the arrangement must generally involve one identifiable asset.

For property investments, this usually means one property title.

For shares, identical shares acquired together may sometimes qualify as a single asset.

However, different classes of shares or different investments generally require separate borrowing arrangements.

For example:

• A parcel of identical ordinary shares may qualify as one asset
• Different share classes may require separate arrangements
• Multiple separate properties may not qualify as a single acquirable asset

This area can become technically complex and often requires professional review.

What Assets Can Be Purchased?

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

Examples may include:

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

However, all normal SMSF rules still apply.

The investment must comply with:

• The sole purpose test
• The fund’s investment strategy
• Arm’s length dealing rules
• Related-party acquisition restrictions
• In-house asset rules

Importantly, certain assets cannot be acquired from related parties, even under an LRBA.

Borrowing Cannot Be Used for Improvements

A common misunderstanding with related party LRBAs involves property improvements.

Borrowed money can generally be used to acquire the asset and pay certain acquisition costs.

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

This is a very important distinction.

Borrowed funds may generally be used for:

• Repairs
• Maintenance
• Restoring the asset to its original condition

However, improvements that substantially enhance the value or character of the asset usually cannot be funded using borrowed money.

For example:

• Replacing broken roof tiles may be repairs
• Repainting a property may be maintenance
• Adding an additional room may be an improvement
• Installing a swimming pool may be an improvement

Improvements may still be possible using the SMSF’s own available cash or contributions, but not through additional borrowed LRBA funds.

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

Sale of the Asset

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

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

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

Personal Guarantees

In some related party LRBAs, members may provide guarantees in support of the borrowing arrangement.

This is permitted provided the arrangement still satisfies the limited recourse requirements.

The rights of the guarantor must also remain limited to the asset acquired under the LRBA.

Related Party LRBAs and ATO Scrutiny

Related party LRBAs receive significant attention from the ATO because they involve transactions between parties that are not independent from one another.

The ATO is particularly concerned about arrangements that provide overly favourable loan terms to the SMSF.

For example:

• Very low interest rates
• No repayments
• Excessively long loan terms
• No security
• Informal documentation
• No genuine repayment obligations

Such arrangements may create tax problems under the Non-Arm’s Length Income (NALI) and Non-Arm’s Length Expenditure (NALE) rules.

Understanding Arm’s Length Terms

Even where the lender is related to the SMSF, the arrangement must still resemble a genuine commercial loan.

This means the loan terms should broadly reflect what an independent commercial lender would offer in similar circumstances.

The ATO has issued Practical Compliance Guideline PCG 2016/5, which outlines “safe harbour” terms for related party LRBAs.

These safe harbour guidelines help trustees structure related party loans on commercial terms.

The safe harbour provisions cover areas such as:

• Interest rates
• Loan term
• Security arrangements
• Repayment requirements
• Loan-to-value ratios

The guidelines apply mainly to:

• Real property
• Listed shares
• Listed units

They do not apply to all asset classes.

What Happens if the Loan Is Not Commercial?

A related party LRBA that does not meet arm’s length principles may trigger the NALI and NALE rules.

These provisions can create serious taxation consequences for the SMSF.

Under these rules, income earned from the asset may be taxed at significantly higher tax rates if the arrangement is considered non-commercial.

Importantly, the ATO has confirmed that if NALE arises under an LRBA, the tainting effect can continue permanently for that asset.

This means future income and even future capital gains on the asset may potentially be treated as non-arm’s length income.

This is one of the major risks associated with poorly structured related party LRBAs.

Commercial Evidence Is Important

Where trustees rely on related party funding, documentation becomes extremely important.

Trustees should maintain evidence showing that the arrangement reflects genuine commercial terms.

This may involve:

• Formal loan agreements
• Mortgage documentation
• Repayment schedules
• Market interest rate comparisons
• Independent valuation evidence
• Commercial loan benchmarking

The ATO expects trustees to demonstrate that the arrangement operates similarly to a genuine commercial loan.

Simply relying on advertised rates from a lender’s website may not be sufficient.

Refinancing and Existing LRBAs

Some existing related party LRBAs may later be refinanced or amended.

Refinancing is generally permitted provided the arrangement remains compliant.

However, substantial changes to an LRBA can potentially trigger new compliance considerations.

Trustees should seek professional assistance before refinancing or restructuring any related party borrowing arrangement.

Offset Accounts and Banking Arrangements

Some related party LRBAs may involve offset account arrangements.

Where offset accounts are offered through Authorised Deposit-taking Institutions (ADIs), they are generally accepted.

However, trustees should exercise caution with non-bank offset arrangements, as they may not receive the same treatment under superannuation law.

Broader Compliance Obligations

Entering into a related party LRBA does not remove the need to comply with broader SMSF obligations.

Trustees must still ensure compliance with:

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

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

Ongoing Administration Responsibilities

Related party LRBAs can create substantial administrative responsibilities for SMSF trustees.

Trustees may need to manage:

• Loan repayment monitoring
• Interest calculations
• Documentation updates
• Audit evidence
• Annual valuations
• Tax reporting
• Holding trust administration
• Compliance reviews

Because related party arrangements are closely scrutinised, maintaining accurate records is extremely important.

Why Professional Advice Matters

Related party LRBAs are among the most technically complex areas of SMSF administration.

They involve overlapping superannuation, taxation, legal, trust, and lending rules.

Incorrectly structured arrangements can result in:

• Compliance breaches
• Loss of concessional tax treatment
• NALI taxation issues
• Audit complications
• Regulatory penalties

Professional assistance is often essential to properly structure, document, and maintain these arrangements.

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 recommendations regarding borrowing through an SMSF or entering into related party loan arrangements. Trustees should seek independent advice from appropriately qualified financial advisers, legal advisers, taxation professionals, and SMSF specialists before establishing or entering into any Limited Recourse Borrowing Arrangement.