Understanding Limited Recourse Borrowing Arrangements (LRBA) in SMSFs
- Josh Foo
- Feb 22
- 3 min read
Updated: Oct 29
An LRBA is a borrowing structure in which the borrowed money is used to acquire a single asset that is held in a separate trust (often called a bare trust or holding trust) for the SMSF. The lender’s security is restricted to that asset.
If the loan defaults, the lender’s recourse is generally limited to the asset acquired under the LRBA, which distinguishes it from conventional borrowing where a lender may have broader claims on the borrower’s assets.
How an LRBA Works
When an SMSF enters into an LRBA, the SMSF (through its trustee) enters into a loan agreement with a lender and an arrangement with a bare trust to hold legal title. The SMSF remains the beneficial owner and is responsible for loan repayments, receives income from the asset, and pays property expenses from fund resources. Once the loan is repaid in full, legal title can be transferred from the holding trust to the SMSF.
What Assets Can Be Purchased Under an LRBA?
LRBAs are most commonly used for residential or commercial property purchases but can apply to other permissible single assets where the arrangement meets regulatory requirements.
Any asset acquired under an LRBA must comply with superannuation law and the SMSF’s investment strategy, and must satisfy the sole purpose test of providing retirement benefits to members.
Risks and Considerations
LRBAs expose an SMSF to borrowing-related risks, such as servicing obligations and potential liquidity shortfalls. Property can be an illiquid asset, which may make meeting loan repayments or tax liabilities challenging if rental income or cashflow is insufficient. Lenders assessing LRBA applications will evaluate serviceability, security, valuation, and the SMSF’s overall compliance position.
Personal Guarantees and Practical Implications
Although an LRBA is designed to limit a lender’s recourse to the specific asset held in the bare trust, many lenders require trustees or related parties to provide personal guarantees or other forms of security as a condition of lending.
When a trustee or director signs a personal guarantee, that signature can reintroduce personal exposure that the limited recourse feature otherwise seeks to avoid. In practical terms, a personal guarantee may allow a lender to pursue the guarantor’s personal assets outside the LRBA if the loan defaults, which changes the risk profile for trustees significantly.
Trustees should be aware that personal guarantees can affect the perceived asset protection benefits of an LRBA. Where a corporate trustee is used, lenders may request director or shareholder guarantees, and where individual trustees exist, lenders may require trustee personal guarantees. These guarantees can also have implications for estate planning and tax considerations, and may influence the terms the lender offers, such as loan-to-valuation ratio or interest rate.
Given these potential outcomes, trustees should carefully review any guarantee wording, understand exactly what they are being asked to guarantee, and consider the broader consequences for personal liability. Trustees are encouraged to obtain independent legal and financial advice before signing guarantees or accepting lending terms. Alternative options, negotiation of guarantee scope, or a lender that does not require guarantees may be explored, but any practical steps should be taken only after qualified professional advice.
Compliance and Strategy
The Australian Taxation Office (ATO) has detailed rules and guidance on LRBAs and related compliance matters. Trustees must ensure any borrowing arrangement is structured and operated in accordance with superannuation law and the fund’s investment strategy. Considerations such as diversification, liquidity, and risk management remain central to deciding whether an LRBA is appropriate for a particular SMSF.
Summary
LRBAs can enable SMSFs to access property and other assets that might otherwise be out of reach, but they introduce borrowing risks and, in some cases, the possibility of personal liability if lenders require guarantees. Trustees should fully understand both the legal LRBA framework and the commercial lending terms before proceeding, and seek qualified professional advice to ensure any arrangement is appropriate for their circumstances.
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DISCLAIMER: This article is provided for general information only. While care has been taken, no guarantee is given as to the accuracy, completeness, or timeliness of the content. It does not constitute financial, accounting, legal, or SMSF advice and does not consider your personal circumstances. You should seek independent, licensed professional advice before making decisions about SMSFs, compliance, or investments. #LRBA #SMSFLoans #SMSFProperty #SMSFCompliance
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