Key takeaways
- An LRBA lets an SMSF borrow to acquire a single asset, usually property.
- The asset is held in a separate holding (bare) trust until the loan is repaid.
- The lender's recourse is limited to that asset, not the rest of the fund.
- Each part must be set up in the right order, before the asset is purchased.
A limited recourse borrowing arrangement (LRBA) is the structure that allows an SMSF to borrow. It has several moving parts, and they must fit together in the right order. Get the sequence wrong, particularly buying the asset before the structure exists, and the arrangement can fail.
The parts of an LRBA
- The SMSF borrows the money and makes the loan repayments from the fund.
- The lender provides the loan on a limited recourse basis.
- The holding (bare) trust holds the legal title to the asset while the loan is on foot. The SMSF has the beneficial interest. See bare trust.
- The acquirable asset, a single asset the fund is allowed to hold, such as a property.
How it works in practice
The fund borrows and uses the loan, plus its own contribution, to buy the asset. The asset is held in the bare trust, with the SMSF as beneficial owner. The fund receives the income (such as rent) and makes the loan repayments. Once the loan is fully repaid, legal title can be transferred from the bare trust to the SMSF.
The limited recourse feature
If the loan defaults, the lender's rights are limited to the single asset in the bare trust. The fund's other assets are protected. Because the lender takes on more risk, SMSF loans often require a larger deposit and carry tighter terms than a personal loan.
The rules that catch people out
- Single acquirable asset. One asset per arrangement. You cannot lump multiple unrelated assets under one LRBA.
- No character-changing improvements with borrowed money. Borrowed funds can maintain and repair, but not transform the asset.
- Order matters. The bare trust must exist and the contract be signed correctly before settlement, not afterwards.
Because the structure is technical and a misstep is costly, an LRBA should be set up with proper legal and SMSF advice. See the full SMSF property loan process.
Frequently asked questions
- What is a limited recourse borrowing arrangement?
- It is the structure that lets an SMSF borrow to buy a single asset. The asset is held in a separate bare trust, and the lender's recourse if the loan defaults is limited to that asset, protecting the rest of the fund.
- Why does an LRBA need a separate trust?
- The holding or bare trust holds legal title to the asset while the loan is outstanding, which is what allows the borrowing to be limited recourse. The SMSF is the beneficial owner and takes legal title once the loan is repaid.
- Can one LRBA cover several properties?
- Generally no. An LRBA must relate to a single acquirable asset (or a collection of identical assets with the same market value). Separate assets need separate arrangements.
