What You Need to Know About Limited Recourse Borrowing Arrangements (LRBAs)
Using a Self-Managed Super Fund (SMSF) to invest in property or shares can be a powerful way to grow your retirement savings. Borrowing to invest through your SMSF leverages the investment strength of the fund. One strategy that allows for this is a Limited Recourse Borrowing Arrangement (LRBA).
While LRBAs can be effective, they are also complex and highly regulated. If you’re considering this approach, it’s essential to understand the structure, risks, and requirements. The team at Continuum Financial Planners can provide tailored advice to help you navigate the process confidently.
What Is an LRBA?
An LRBA allows your SMSF to borrow funds to acquire a single asset or a group of identical assets with the same market value. Common examples include:
- A residential or commercial property
- A parcel of identical shares (e.g. 100 BHP shares)
- Business real property used in a related business
The key feature is that the borrowing is limited recourse—if the SMSF defaults, the lender’s claim is limited to the asset acquired with the loan. This protects the rest of the SMSF’s assets.
How Does an LRBA Work?
Here’s a simplified overview:
- Your SMSF secures a loan.
- A separate bare trust (also known as a holding trust) is established to legally hold the asset.
- The SMSF receives all income generated by the asset (e.g. rent or dividends).
- The SMSF is responsible for all expenses (e.g. loan repayments, maintenance, rates, and insurance).
- Once the loan is fully repaid, legal ownership of the asset transfers to the SMSF.
What Can You Buy Under an LRBA?
You may use borrowed funds to purchase:
- One property (residential or commercial)
- One parcel of identical shares (e.g. 100 NAB shares)
You cannot use an LRBA to:
- Purchase multiple unrelated assets in one transaction
- Buy mixed parcels of shares (e.g. 50 NAB and 50 BHP)
Once the loan is repaid and ownership transfers to the SMSF, these restrictions no longer apply.
Funding Options: Third-Party vs Related-Party Loans
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Third-party lenders
Most major banks and specialist lenders offer SMSF-compliant loan products that meet the requirements under the Superannuation Industry (Supervision) Act 1993.
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Related-party loans
A fund member or related entity can lend money to the SMSF—but the loan must be on arm’s length terms to comply with ATO requirements:
- Interest rates must reflect market conditions
- Loan terms should mirror what a commercial lender would offer
- A formal loan agreement is essential
Non-compliance can result in severe penalties, including additional tax and possible fund disqualification.
Legal Structure and Ownership
During the loan term:
- The bare trust holds legal title to the asset
- The SMSF holds beneficial ownership and receives all income
- The SMSF pays all outgoings and manages the investment
- Once the loan is fully repaid, legal title transfers to the SMSF
This structure limits the lender’s rights and protects the SMSF’s other assets in case of default.
SMSF Compliance: Trust Deed and Investment Strategy
Before implementing an LRBA, ensure:
- Your SMSF trust deed explicitly allows for borrowing and property investment
- Your investment strategy includes reference to the borrowing and demonstrates how it aligns with the fund’s objectives
Key compliance questions to consider:
- Can the SMSF cover loan repayments and property costs without compromising other obligations?
- Will the fund be able to pay pensions or other member benefits?
- Does acquiring a large, illiquid asset align with the fund’s broader investment strategy?
Other Considerations
Before entering into an LRBA:
- Review and, if necessary, update your SMSF trust deed and investment strategy
- Understand the full cost of the investment, including interest, property expenses, land tax, insurance, legal fees, and ongoing maintenance
- Ensure any related-party transactions are conducted at market value and fully documented
- Seek independent legal, tax, and financial advice
Mistakes can result in serious compliance breaches and tax penalties—so it pays to get it right.
Considering an LRBA for Your SMSF?
Borrowing through your SMSF can be a smart way to access property or shares that may otherwise be out of reach, helping to build long-term wealth for retirement. However, this strategy involves complexity, risk, and careful planning.
At Continuum Financial Planners, we can help you:
- Assess whether an LRBA suits your financial goals
- Ensure compliance with SMSF regulations
- Work with your accountant and legal team to get the structure right from the start
Contact us to arrange a discussion about whether borrowing through your SMSF is the right for you to meet your personal financial goals and objectives. To make an appointment with one of our experienced advisers –
- Phone our office on 07-34213456, or
- At your convenience, use the linked Book A Meeting facility.
(This article was first posted by us in June 2025.)
