Imagine you’re looking at a commercial property that could transform your retirement portfolio. The numbers look solid. The location is perfect. There’s just one problem: your Self-Managed Super Fund doesn’t have enough cash to buy it outright.
This is where a Limited Recourse Borrowing Arrangement comes in. An LRBA allows your SMSF to borrow money to purchase assets—typically property—without putting your entire retirement savings at risk. It’s a powerful strategy, but only when you understand how it works and follow the rules carefully.
At its core, an LRBA creates a protective barrier. If something goes wrong and you can’t repay the loan, the lender can only claim the asset you purchased with that loan. Your other super assets remain protected. This “limited recourse” feature makes borrowing within your SMSF fundamentally different from traditional property loans.
For many SMSF trustees, this opens doors that would otherwise remain closed. You might have $300,000 in your fund, but with an LRBA, you could potentially acquire a $500,000 property. The appeal is obvious: you’re using leverage to accelerate your wealth-building while keeping your existing retirement savings quarantined from the borrowing risk.
The Real Benefits of Using an LRBA
The pathway to property investment through your super fund offers genuine advantages when structured correctly. Let’s be clear about what you’re actually gaining.
First, there’s the leverage factor. Property rarely comes cheap, especially quality commercial or residential assets that deliver strong returns. An LRBA lets you access opportunities that would otherwise require years of additional contributions to your fund. You’re not waiting until you’ve saved enough—you’re acting now while the opportunity exists.
Second, you’re potentially enhancing your retirement outcomes through capital growth. Property values tend to appreciate over time, and rental income can provide steady cash flow to your fund. For strategic approaches to maximizing these benefits, explore our guide on superannuation property investment strategies. When you combine this with the tax advantages of superannuation—where investment earnings are taxed at just 15% during accumulation phase—the compounding effect becomes substantial.
Third, you’re diversifying your SMSF portfolio beyond shares and cash. Many trustees hold too much in a single asset class. Adding property creates balance, potentially reducing overall portfolio volatility. Different assets perform well at different times, and property often moves independently of share markets.
But here’s what matters most: an LRBA gives you control. You choose the property. You manage the investment. You make the decisions that align with your retirement vision. That level of autonomy appeals to SMSF trustees who’ve already demonstrated they want hands-on involvement in their financial future.
Understanding the Legal Framework
Before you borrow a single dollar, you need to understand the rules that govern LRBAs. Getting this wrong doesn’t just mean a failed investment—it can trigger penalties, tax consequences, and compliance issues that haunt your fund for years.
The Superannuation Industry (Supervision) Act 1993 sets out strict requirements for LRBAs. These aren’t suggestions. They’re mandatory conditions that determine whether your borrowing arrangement is legal.
Start with your SMSF trust deed. Not all deeds automatically permit borrowing. You need explicit permission in your deed to enter an LRBA. If your deed is silent on borrowing or specifically prohibits it, you’ll need to update it before proceeding. This isn’t optional. Operating outside your trust deed is a fundamental compliance breach.
Next comes the loan agreement itself. This document must be properly drafted and must meet arm’s-length requirements. What does arm’s-length mean? Simply put, the terms of your loan should reflect what an unrelated commercial lender would offer. The interest rate should be market-reasonable. The repayment terms should be commercial. The security arrangements should be standard.
This becomes particularly important when you’re borrowing from related parties—perhaps from your own company or family members. The ATO pays close attention to these arrangements. If they determine your loan terms are too generous or don’t reflect commercial reality, they can challenge the entire structure. The consequences can include having your SMSF deemed non-compliant, with potential tax penalties on the entire fund balance.
The loan agreement must also clearly specify the limited recourse nature of the borrowing. The lender’s rights must be limited to the asset purchased with those funds. This protection is what makes the arrangement permissible under superannuation law. Without this limitation, you’re not operating an LRBA—you’re breaching fundamental super rules.
Documentation matters here. You need written evidence of everything: the loan agreement, the bare trust deed (more on that shortly), records of repayments, property valuations, and all correspondence with your lender. Your SMSF auditor will review these documents annually. Missing or inadequate documentation raises red flags and can result in audit qualifications.
How Asset Ownership and Lender Recourse Actually Work
Here’s where LRBAs differ fundamentally from normal borrowing. The structure itself is designed to protect your fund while allowing investment.
When your SMSF borrows under an LRBA, the property doesn’t immediately transfer into the fund’s name. Instead, it’s held in a separate trust—called a bare trust or holding trust. This trust exists for one purpose: to hold the legal title to the property until the loan is fully repaid.
Your SMSF is the beneficiary of this bare trust. You have all the beneficial rights to the property—the rental income, the capital growth, the tax benefits. But legal ownership sits in the bare trust until you’ve paid off the loan. Once the final payment clears, legal title transfers from the bare trust to your SMSF.
This structure is what creates the “limited recourse” protection. If you default on the loan, the lender can only pursue the asset held in the bare trust. They cannot reach into your SMSF and claim your shares, your cash, or any other property you own. Those assets remain completely protected.
The single acquirable asset rule is crucial here. Each LRBA can only finance one asset. You can’t bundle multiple properties into one borrowing arrangement. If you want to purchase two properties, you need two separate LRBAs, each with its own bare trust and loan agreement. The ATO is strict about this. They’ve issued guidance that even similar properties—like identical units in the same building—require separate arrangements.
What qualifies as an eligible asset? Generally, property works well—residential, commercial, or industrial. Shares in listed companies can also be purchased through LRBAs, though this is less common. The key requirement is that the asset must be a “single acquirable asset” as defined by legislation.
One important limitation: you cannot make improvements that fundamentally change the asset’s character. You can maintain and repair the property—that’s expected. But major renovations or developments that transform the asset create compliance issues. The asset you’re repaying the loan on needs to remain substantially the same as what you originally purchased.
What You Cannot Do With an LRBA
Understanding the boundaries is just as important as understanding the opportunities. Some actions that seem logical or beneficial are actually prohibited under SMSF rules.
You cannot use existing SMSF assets as security for an LRBA loan. This seems counterintuitive—if you have $200,000 in shares, why not use those as additional security for your property loan? Because it defeats the entire purpose of limited recourse borrowing. The moment you pledge other fund assets, you’ve breached the limited recourse requirement. Your lender’s claim must be limited to the purchased asset alone.
You cannot structure your LRBA to circumvent contribution caps. Some trustees think they can effectively contribute to their fund by having a related party forgive loan debts or offer extremely favorable loan terms. The ATO views this as a disguised contribution, which can breach contribution caps and trigger excess contributions tax.
You cannot purchase the property from yourself or related parties except in very specific circumstances. The sole purpose test requires that your SMSF exists to provide retirement benefits, not to facilitate transactions that benefit you now. Buying your own home to rent it back to yourself violates this principle. There are limited exceptions—like commercial property used in your business—but these require careful structuring and compliance.
You cannot use LRBA funds to develop property significantly. Remember that single acquirable asset rule? If you buy vacant land and build on it, you’ve created a different asset than what you borrowed to purchase. This isn’t just a technicality—it’s a fundamental compliance issue that can invalidate your entire LRBA structure.
Improper structuring triggers serious consequences. The ATO can impose administrative penalties, levy additional tax on your fund’s income at the highest marginal rate, or even declare your fund non-complying. Learn more about avoiding these pitfalls in our article on LRBA compliance rules. A non-complying fund loses all tax concessions, with the entire balance potentially taxed at 45%. These aren’t minor penalties—they can destroy years of careful retirement planning.
Practical Steps for Setting Up Your LRBA
Let’s walk through what actually needs to happen when you’re ready to proceed with an LRBA.
First, confirm your SMSF trust deed permits borrowing. Review your deed carefully or have your SMSF administrator or lawyer check it. If borrowing isn’t explicitly permitted, you’ll need a deed update before proceeding. This typically costs between $200 and $800, depending on your provider.
Second, update your investment strategy. Your SMSF’s investment strategy must reflect your intention to borrow and acquire property. Document how this aligns with your fund’s objectives, your risk tolerance, and your retirement timeline. This isn’t just paperwork—it’s a legal requirement that demonstrates you’ve considered whether the investment is appropriate for your circumstances.
Third, engage professionals. You’ll need legal documents drafted: a loan agreement and a bare trust deed. Don’t use templates from the internet. SMSF law is complex and specific. A mistake in these documents can invalidate your entire structure. Expect to pay $1,500 to $3,000 for proper documentation from a qualified SMSF lawyer or specialist provider.
Fourth, arrange your financing. If you’re borrowing from a commercial lender, shop around for competitive rates. At Aries Financial, we specialize in SMSF lending with rates starting from 5.99% PI and approvals within 1-3 business days. For detailed rate comparisons, see our analysis of current LRBA interest rates. If you’re borrowing from a related party, ensure your interest rate reflects market rates. Document your research showing what commercial lenders charge for similar loans.
Fifth, obtain an independent valuation. Even if your lender doesn’t require it, you need evidence that you’re paying fair market value for the property. This protects you if the ATO ever questions whether the transaction was conducted on arm’s-length terms. The cost—typically $300 to $600—is worthwhile insurance.
Sixth, establish the bare trust. The bare trust needs a separate trustee—this cannot be the same trustee as your SMSF. Often, a corporate trustee is established specifically for this purpose. Your lawyer will guide you through this process.
Finally, execute the purchase with all parties properly documented. The bare trust signs the contract of sale, your SMSF provides the funds (deposit and borrowed funds), and all transactions flow through proper SMSF bank accounts with clear records.
Throughout this process, maintain meticulous records. Your SMSF auditor will want to see evidence of every step: board minutes approving the investment, records of the decision-making process, copies of all legal documents, and proof that loan terms are commercial.
Ongoing Governance and Risk Management
Setting up your LRBA correctly is just the beginning. Maintaining compliance requires ongoing attention and management.
Make loan repayments on time, every time. Missed or late payments can breach the terms of your loan agreement and potentially violate superannuation rules if they suggest financial instability in your fund. Set up automatic payments from your SMSF bank account to ensure you never miss a due date.
Monitor your fund’s liquidity carefully. Property is illiquid—you can’t sell it quickly if you need cash. Ensure your SMSF maintains sufficient liquid assets to meet loan repayments and any member benefit payments that might become due. Running out of cash and being unable to meet obligations creates serious compliance risks.
Review your investment strategy annually. The ATO expects trustees to regularly consider whether their investments remain appropriate. Document your review process. If circumstances change—market values shift, rental income drops, your retirement timeline changes—update your strategy accordingly.
Higher administration costs come with LRBAs. You’re paying interest on the loan, maintaining the bare trust structure, and potentially incurring higher audit fees due to the complexity. Factor these costs into your return expectations. An investment that looks attractive on paper may be marginal once all costs are included.
Market volatility affects both your asset value and loan viability. Property values can decline, reducing equity and potentially creating issues if you need to refinance. Rental vacancies can strain your cash flow. Consider these risks seriously. An LRBA amplifies both gains and losses through leverage.
Stay informed about regulatory changes. SMSF rules evolve. What’s permitted today might be restricted tomorrow. The ATO regularly releases new guidance on LRBAs. Your SMSF professional should keep you updated, but ultimately you’re responsible for compliance.
If problems emerge—perhaps rental income drops or interest rates rise significantly—address them immediately. Don’t ignore warning signs. Early intervention might mean adjusting your repayment strategy, seeking refinancing, or even selling the property before a default occurs. A proactive approach protects your broader retirement savings.
Your LRBA Compliance Checklist
Before you commit to an LRBA, work through this checklist to ensure you’ve addressed every critical compliance and governance requirement:
Documentation
- ☐ SMSF trust deed explicitly permits borrowing
- ☐ Investment strategy updated to reflect LRBA
- ☐ Formal loan agreement drafted by qualified professional
- ☐ Bare trust deed properly established
- ☐ Independent property valuation obtained
- ☐ All documents signed and dated correctly
Structure
- ☐ Loan terms are at arm’s length (market-rate interest, commercial conditions)
- ☐ Lender’s recourse limited to purchased asset only
- ☐ Single acquirable asset rule satisfied
- ☐ Bare trust has separate trustee from SMSF
- ☐ Asset held in bare trust until loan repaid
Ongoing Compliance
- ☐ Regular loan repayments scheduled and automated
- ☐ Sufficient SMSF liquidity to meet all obligations
- ☐ Annual investment strategy review documented
- ☐ All transactions recorded with proper evidence
- ☐ SMSF auditor provided with complete documentation
Risk Management
- ☐ Property insurance in place and appropriate
- ☐ Contingency plan for rental vacancies or income disruption
- ☐ Regular monitoring of property value and loan equity
- ☐ Professional advice engaged when circumstances change
An LRBA can be a powerful tool for building wealth within your super fund, but it demands careful planning, proper structuring, and ongoing diligence. The protective barrier of limited recourse only works when you’ve built the structure correctly and maintained it properly.
Your retirement savings represent decades of hard work and disciplined saving. They deserve the protection that comes from doing things right. Take the time to understand the rules, engage qualified professionals, and maintain meticulous records. The investment in proper setup and ongoing management pays dividends in compliance security and peace of mind.
When structured correctly and managed diligently, an LRBA allows you to pursue property investment opportunities that accelerate your path to retirement security—without gambling your entire future on a single decision.
