What is an LRBA? How SMSFs can borrow to invest in property

Setting up a Self-Managed Super Fund (SMSF) allows for more control and flexibility over your retirement savings—including the ability to invest in residential property or commercial property, including business real property. But if your SMSF doesn’t have enough capital to purchase property outright, it may be able to borrow funds through a structure known as a Limited Recourse Borrowing Arrangement (LRBA).

What Is a Limited Recourse Borrowing Arrangement (LRBA)?

A Limited Recourse Borrowing Arrangement allows an SMSF to borrow money to purchase a single asset—typically real property—using a limited recourse loan. This means if the SMSF defaults on the loan, the lender's rights are limited to the asset held under the LRBA. They cannot access the fund’s other assets, helping to protect your retirement savings.

Key Components of an LRBA

To meet ATO rules, a compliant LRBA involves:

Bare Trust Setup

The asset must be held in a separate trust (called a bare trust) with a corporate or individual trustee. The legal title to the property is held by the bare trustee.

Single Acquirable Asset

The borrowed money must be used to acquire a single asset or a collection of identical assets with the same market value.

Beneficial Interest

While the legal title is held by the bare trustee, the SMSF retains the beneficial interest in the asset.

Limited Recourse

If the loan is not repaid, the lender’s recourse is restricted to the asset held in the borrowing arrangement.

How the Structure Works

Setting up an LRBA requires careful planning and strict compliance with superannuation laws.

Here’s a step-by-step breakdown of how the structure works:

1. Set Up a Self-Managed Superannuation Fund (SMSF)

To begin, you'll need to establish an SMSF with a valid trust deed that explicitly allows the fund to borrow money and invest in real property. The SMSF trustee (whether individual or corporate) is responsible for ensuring the fund’s operations stay compliant with ATO regulations and the fund’s investment strategy.

2. Establish a Bare Trust

A separate trust, known as a bare trust or holding trust, is required to legally hold the acquirable asset (typically a residential or commercial property) on behalf of the SMSF. The legal title to the property is held by the bare trustee, while the SMSF maintains the beneficial interest. This separation is critical under the limited recourse borrowing rules, as the smsf trustee cannot hold legal title to the property while the loan is active.

3. Rollover Super Into the SMSF

Once the SMSF is established, members can roll over balances from other superannuation funds into the SMSF. These consolidated funds will typically be used to form the deposit on the property and cover initial setup costs. A 20–30% deposit is usually required, depending on the lender’s criteria and the nature of the borrowed funds.

4. Apply for a Limited Recourse Loan

The SMSF can then apply for a limited recourse loan from an approved lender. These loans come with strict borrowing conditions, and not all banks offer them. Importantly, the lender’s claim is restricted to the single acquirable asset held within the bare trust, protecting other fund assets if the loan defaults.

5. Acquire the Property via the Bare Trust

Once approved, the property is purchased in the name of the bare trustee, with the SMSF listed as the beneficial owner. The asset must qualify as a single asset or a collection of identical assets with the same market value, and must align with the SMSF’s investment strategy. The asset cannot be lived in or used by fund members or related parties, except in specific business real property arrangements under an arm’s length lease.

6. Loan Repayments

All loan repayments must be made from the SMSF itself—not from any personal or external sources. These payments can be funded by rental income, employer contributions, member contributions, or investment earnings. Over time, as the loan is paid down, the SMSF builds equity in the property while retaining the associated tax advantages of holding the property within super.

What Kind of Property Can You Purchase?

Under an LRBA, your SMSF can acquire:

• Residential property (not lived in or rented by fund members or related parties)
• Business real property (e.g. a commercial property leased to your business at arm’s length)

In both cases, the property must be a single asset that is clearly identifiable and not mixed with others.

Compliance Tips and Common Pitfalls

• You cannot use borrowed funds to improve the property—only to acquire it.
• Related party loans must be on commercial terms.
• The property must meet the fund’s investment strategy and be used to provide retirement benefits.
• Replacement assets can only be acquired under very limited circumstances (e.g. insurance payout).

Failure to comply with LRBA rules can result in severe penalties and taxation consequences for the SMSF.

Is an LRBA Right for Your SMSF?

At Causbrooks Finance, we help you navigate the complexities of SMSF borrowing, from structuring your bare trust correctly to securing a limited recourse loan that fits your fund’s goals.

We work closely with the smsf trustee and accountant to ensure your loan and property investment align with ATO requirements and your long-term investment strategy.

Book a consultation today to see whether using your self-managed super fund to borrow money for property could work for you.