LRBAs in SMSFs: how self-managed super funds can borrow to buy property — and the risks involved

Self-managed superannuation funds (SMSFs) are generally prohibited from borrowing. The Superannuation Industry (Supervision) Act 1993 (SIS Act) contains a broad borrowing prohibition under section 67, which exists to protect member benefits from the risks that come with leverage. There is, however, a specific exception: section 67A allows SMSFs to borrow through a structure called a Limited Recourse Borrowing Arrangement (LRBA). Understanding what an LRBA is, how it works, and where it creates risk is essential for any SMSF trustee considering geared property within their fund.

What is the LRBA structure?

An LRBA involves the SMSF borrowing money from a lender — typically a bank or a non-bank specialist lender, though related-party loans from members are also possible — to acquire a single asset, most commonly property. The defining structural feature is that the lender's recourse in a default is limited to the asset itself; other SMSF assets cannot be touched if the loan goes bad. This limited recourse protection is the heart of the arrangement and the reason the exception to the borrowing prohibition was created: it allows geared acquisition while preventing a defaulting loan from wiping out the entire fund.

During the life of the loan, legal title to the asset is held by a separate bare trust, not by the SMSF itself. The SMSF holds beneficial ownership and is entitled to the income and use of the asset, but legal title only transfers to the SMSF once the loan is fully repaid. The bare trust is transparent for tax purposes — income, gains, and expenses of the asset are attributed directly to the SMSF, not treated as separate trust income.

The asset acquired must be a "single acquirable asset" — a single, identifiable thing rather than a portfolio. For most LRBAs, this is a single residential or commercial property. Commercial property is particularly common, especially for business owners whose operating companies occupy the premises.

Who lends for LRBAs and what are the terms?

For most of the 2010s, the major banks were the primary source of LRBA finance. Following APRA guidance issued in September 2018 — which flagged LRBAs as a source of risk and encouraged lenders to review their exposure — the major banks largely withdrew from or substantially reduced their LRBA lending. Non-bank specialist lenders continue to provide LRBA finance and represent the mainstream market today.

Loan-to-value ratios are generally lower than for personal property lending — typically in the range of 60–70% of the property's value for residential LRBA properties and around 65–75% for commercial, though these vary between lenders and are not statutory limits.

Related-party loans — where SMSF members or their associates lend to the fund — are permitted but must satisfy the arm's length requirements under section 109 of the SIS Act. The ATO's Practical Compliance Guideline PCG 2016/5 provides a safe harbour for related-party LRBA loans: provided the loan meets the safe harbour conditions (a maximum 70% loan-to-value ratio for real property, principal-and-interest repayments, a registered mortgage as security, and a loan term not exceeding 15 years), the ATO will not treat the arrangement as non-arm's length. The interest rate under the safe harbour is benchmarked to the RBA's indicator lending rates plus a margin — the specific applicable rate should be confirmed with the ATO, as it moves with RBA rates. Funds that don't meet the safe harbour are not automatically non-compliant, but the arm's length standard must be satisfied through other means.

How is an LRBA property taxed in an SMSF?

The tax treatment of an LRBA property generally follows standard SMSF tax rules. Interest paid on the LRBA loan is deductible to the fund. Rental income is assessable — taxed at 15% during the accumulation phase, reducing to 0% once the fund (or the relevant member's proportion) moves into pension phase. Capital gains on disposal attract the standard CGT treatment: a one-third discount applies where the asset has been held for more than 12 months, and the discounted gain is included in the fund's assessable income and taxed at the applicable rate (15% in accumulation, 0% in pension phase).

The combination of a rental income stream taxed at 15% or 0%, deductible interest, and a discounted capital gain at disposal is what makes the LRBA structure attractive from a tax perspective, particularly for assets held through the member's transition to pension phase.

How does an LRBA work for a business owner?

The LRBA is particularly appealing for business owners whose companies pay market rent for commercial premises. Consider a fund with $600,000 in accumulated benefits. The SMSF acquires the business's operating premises for $1 million using an LRBA — $400,000 from the fund and $600,000 from an LRBA loan. The business pays commercial rent to the fund, which is deductible to the company and assessable to the fund at 15% (or 0% in pension phase). The rent services the loan and the members continue contributing. At retirement, the rent continues to flow into the fund, supporting pension drawdowns, and the property has been accumulated within the super system rather than outside it. Converting a recurring business expense (rent) into a super asset is a well-established use of the LRBA framework.

What are the main risks and traps with LRBAs?

The major risk is concentration: a single LRBA property can represent a very large proportion of an SMSF's total assets, creating a heavily concentrated exposure to a single asset in a single location. Property markets can fall, tenants can default, and insurance gaps can materialise. A fund heavily weighted to a single LRBA property is exposed in ways a diversified fund is not.

A specific and commonly misunderstood restriction is the distinction between repairs and improvements. Repairs — restoring the asset to its original condition — can be funded from any source, including the LRBA loan. Improvements — adding to, upgrading, or substantially changing the asset — generally cannot be funded from borrowed money under the LRBA. A member who expects to renovate the property using loan funds typically finds this is not permitted; renovation costs need to come from fund cash or member contributions rather than the loan itself. This distinction matters substantially for properties requiring significant work.

Liquidity is another practical concern. Property is illiquid and cannot be partially sold. The fund must maintain sufficient liquid assets (cash, shares) to service the LRBA loan repayments, meet minimum pension drawdown obligations in pension phase, and cover running costs. A fund that commits too large a proportion of its balance to the property can find itself unable to meet these obligations without selling assets at an inopportune time.

Finally, the transition of an LRBA into pension phase requires careful planning — drawdown requirements, loan servicing obligations, and property income need to align. And member death while an LRBA is outstanding creates its own complexities for bare trust transfer and loan continuation that need to be addressed in both the fund's trust deed and estate planning.

LRBAs are technically demanding. The bare trust documentation, lender requirements, arm's length compliance, the repairs-versus-improvements boundary, and transition planning all require specialist input. Specialist SMSF legal advice for establishment, specialist SMSF accounting for ongoing compliance, and financial advice on whether the strategy is appropriate for the individual's circumstances are all genuinely necessary — not optional additions.