Limited Recourse Borrowing Arrangements (LRBA) Explained: A Plain-English Guide

A superannuation fund is normally restricted from borrowing. The rules that govern super funds are designed to protect retirement savings from excessive risk. But there is a specific exception — a tightly regulated pathway that allows super funds to borrow for the purpose of acquiring a single asset, most commonly a property.

That exception is the Limited Recourse Borrowing Arrangement. The ATO sanctions this structure, subject to specific conditions being met.

Why “Limited Recourse”?

This is the part most explanations skip over, but it’s the most important element of the structure.

In a normal mortgage, if you default on the loan, the lender can pursue all of your assets to recover what they’re owed. Your home, your savings, your other investments — everything is potentially in play.

In an LRBA, the lender’s recourse is limited to the specific asset being purchased. If the SMSF defaults on the loan, the lender can take the property. They cannot pursue the rest of the super fund’s assets. This is the protection that makes borrowing inside super acceptable — the retirement savings of the fund members are shielded from the lender’s claims on the specific asset.

This is also why the asset must be held in a separate bare trust during the loan term, rather than directly in the SMSF.

The Bare Trust Structure

The property purchased under an LRBA is not owned directly by the SMSF during the loan term. Instead, it’s held by a separate entity called a bare trustee — typically a company — which holds the property on trust for the SMSF. The SMSF is the beneficial owner; the bare trustee holds legal title.

Once the loan is fully repaid, the legal title transfers from the bare trustee to the SMSF directly. At that point, the bare trustee structure is no longer needed.

This additional structure — the bare trustee — must be established correctly before the purchase proceeds. Getting this wrong creates significant compliance problems.

What Can Be Purchased

An LRBA can be used to purchase a single acquirable asset — a property or a parcel of shares, most commonly. You cannot use an LRBA to purchase multiple different assets or to fund development activities. The property must be acquired in its current form; you cannot use borrowed funds to substantially improve it.

For commercial property, the LRBA is a well-established and frequently used pathway. For residential property, the structure was used extensively until regulatory changes restricted new residential property borrowing. Existing arrangements were grandfathered.

The Lending Environment

SMSF lending has its own specific parameters. Lenders who offer SMSF LRBA products typically require the fund to have a minimum balance — often $200,000 or more — before they’ll consider a loan application. Interest rates on SMSF loans tend to be higher than standard residential mortgages. Loan-to-value ratios are generally capped at 70% for residential and 65% for commercial.

The higher cost of the structure needs to be modelled against the tax benefits to confirm that the arrangement is genuinely advantageous. In most cases where the fundamentals stack up, it is. But this is not a calculation to do roughly.
Compliance Is Non-Negotiable

The ATO watches SMSF borrowing arrangements carefully. The loan must be on arm’s length terms. The property cannot be used for personal benefit. Related party transactions — while permitted in some circumstances — require careful navigation.

Setting up an LRBA correctly requires the right professional team: an SMSF specialist, a conveyancer familiar with the structure, an accountant who understands super fund tax, and a lender with SMSF experience.

Living Property Partners specialises in Property Through Super and can connect clients with the right professionals to assess and structure an LRBA correctly. If you’re interested in understanding whether this pathway suits your situation, book a free consultation.