Understanding Limited Recourse Borrowing Arrangements (LRBA) in SMSFs

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.

Limited Recourse Borrowing Arrangements (LRBA)

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.

---

UNDERSTAND THE SMSF JOURNEY

Every SMSF journey is unique. Connect with our team to explore SMSF considerations and understand how different professionals may fit into the process.

EXPLORE YOUR SMSF OPTIONS >

(GENERAL INFORMATION ONLY)

---

DISCLAIMER: This article is provided for general information and educational purposes only. It does not constitute financial, legal, tax, investment, or other professional advice and has been prepared without taking into account your personal objectives, financial situation, or needs. This article may include perspectives from industry contributors. Contributor participation does not imply endorsement, recommendation, or preferred referral status. While reasonable care has been taken in preparing this content, no representation or warranty is made as to its accuracy, completeness, or currency. SMSF Intelligence does not accept liability for any loss or damage arising from reliance on this information or any linked materials. SMSF Intelligence does not provide financial, legal, or tax advice. Before making any decisions, you should consider the appropriateness of the information in light of your circumstances and seek advice from a suitably qualified and licensed professional.