SMSF Loans: Limited Recourse Borrowing Explained

Key takeaways

• The property must be a single acquirable asset held in a bare trust.
• Recourse is limited to that asset, which is why rates are higher and LVRs lower.
• The fund must service the loan from rent and contributions alone.
• You generally cannot improve the property in a way that changes its character while borrowed.

The structure

An LRBA has moving parts a standard purchase does not:

• The SMSF makes the deposit and services the loan.
• A bare trust (holding trust) holds legal title to the property.
• A corporate trustee of the bare trust, usually required by lenders.
• The lender takes a mortgage limited in recourse to that asset.

Getting the structure wrong - buying in the fund's name, or acquiring two titles under one LRBA - can breach the SIS Act. This is the part that requires proper advice, not a template.

What lenders require

The rules that catch people out

• Single acquirable asset. One title per LRBA. Two lots usually means two arrangements.
• No improvements that change character. Repairs and maintenance are fine; borrowed funds cannot be used to improve, and improvements from other funds must not change what the asset is.
• Arm's length in everything. Rent must be at market rate, documented, and actually paid.
• Residential property cannot be lived in by members or related parties - not even briefly.
• Business real property is the exception that can be leased to a related business, at market rent.

Frequently asked questions

Can my SMSF buy my business premises?

Yes. Business real property is a specific exception allowing an SMSF to acquire premises from, and lease them to, a related party - provided everything is at arm's length market rates and properly documented.

What happens if the fund cannot meet repayments?

The lender's recourse is limited to the property, so other fund assets are protected. But the fund still has to fund any shortfall from its own resources, and contribution caps limit how much can be added.

Is an SMSF loan worth the complexity?

It depends on the fund balance, the asset and the time horizon. Set-up, ongoing administration and audit costs are materially higher than a personal purchase, so small transactions rarely justify it. Get licensed financial advice.

Related reading

• Business Loan Types: A Complete Australian Guide
• Investment Property Loans: What Is Different
• Trade Finance for Australian Importers

Sources

• Limited recourse borrowing arrangements — Australian Taxation Office
• SMSF investment rules — Australian Taxation Office