SMSF Property Loans —
What an LRBA really involves

What an LRBA actually is

A self-managed super fund (SMSF) cannot simply borrow to buy property the way an individual investor can. Under the Superannuation Industry (Supervision) Act 1993, super funds are generally prohibited from borrowing, with a narrow exception for what is called a Limited Recourse Borrowing Arrangement (LRBA). This is the only legal pathway for an SMSF to take on debt to acquire a single asset, such as a residential or commercial property.

Under an LRBA, the loan is "limited recourse", meaning the lender's rights in the event of default are limited to the asset purchased with the loan. Other assets in the fund are protected. To achieve this, the property is held in a separate bare trust (sometimes called a holding trust or custodian trust) until the loan is repaid, at which point legal title can transfer to the SMSF.

The Australian Taxation Office, which regulates SMSFs, publishes detailed guidance on LRBAs. If you are seriously considering this strategy, the ATO's LRBA page is essential reading.

Eligibility and the sole purpose test

Every SMSF investment has to satisfy the sole purpose test: the fund must be maintained solely to provide retirement benefits to its members. A property bought through an LRBA is no exception. That means:

• The property must be acquired and held to grow members' retirement savings, not to provide a personal benefit today
• For residential property, members and related parties cannot live in it or rent it (even at market rates)
• For commercial property, the fund can lease to a related party (for example, your own business) but only at fully documented market rent
• The property must be a single acquirable asset — you generally cannot use one LRBA to buy a development site and subdivide it

Breaches of these rules can have serious tax consequences, including the fund being taxed at the top marginal rate or losing its complying status. This is one of the main reasons SMSF property is not a casual decision.

Deposits, LVRs and rates

SMSF lending is a smaller and more conservative market than personal home lending. The pool of lenders willing to write LRBAs has narrowed in recent years — many of the major banks have stepped back, and the market is now dominated by a smaller group of non-major lenders specialising in SMSF.

As a result, you should generally expect:

• Deposits of around 30 per cent or more for residential property and often 30 to 35 per cent for commercial
• Higher interest rates than equivalent personal investment loans, often by a meaningful margin
• Tighter serviceability assessments, with rental income often shaded and contributions assessed conservatively
• Limits on loan size, property type and location
• Setup fees for the bare trust and additional legal costs

The fund also needs sufficient liquidity inside super to cover the deposit, stamp duty, legal and trust setup costs, ongoing loan repayments, insurance, rates and any cash-flow gaps between tenancies.

The bare trust structure

The legal structure is unusual and worth understanding before you commit. A typical LRBA looks like this:

• The SMSF trustee applies for the loan and provides the deposit
• A separate bare trust is established, with its own trustee (often a corporate trustee), to hold legal title to the property
• The lender registers a mortgage over the property held in the bare trust
• Rent flows to the SMSF; the SMSF makes loan repayments
• Once the loan is fully repaid, legal title can be transferred from the bare trust to the SMSF

Setting this up correctly — in the right order, with the right documents, and with the contract of sale in the right name from day one — is critical. Mistakes here can disqualify the structure or trigger double stamp duty in some states.

The serious cons (and why advice is essential)

An LRBA can be a legitimate strategy for some SMSFs, but the downsides are real and need to be weighed honestly:

• Concentration risk — a single property can dominate a small SMSF, leaving the fund exposed if the asset underperforms
• Liquidity risk — property is illiquid; if a member retires or dies, the fund may struggle to pay benefits without selling the asset
• Compliance risk — the fund must satisfy the sole purpose test, the in-house asset rules, and the LRBA rules every year. The ATO actively reviews SMSFs
• Cost — setup fees, ongoing audit costs, higher loan rates and bare trust costs can erode returns
• Inflexibility — improvements that change the character of the property are restricted while the loan is in place

The Australian Securities and Investments Commission's MoneySmart guide to SMSFs sets out the broader risks of running your own super fund, and is a good starting point.

Who you need on your team

SMSF property lending is the part of mortgage broking where we are most insistent that clients build a proper advisory team before signing anything. At a minimum, that means:

• A licensed financial adviser who can assess whether SMSF property fits your retirement strategy and risk profile
• An SMSF accountant to handle structure, ongoing compliance and tax
• A solicitor experienced in SMSF and bare trust documents
• A mortgage broker familiar with the small group of active SMSF lenders

This article is general information only. It is not financial, credit, tax or legal advice. Whether an LRBA suits your circumstances depends on your fund, your members, your retirement goals and current legislation, all of which can change. Speak to a qualified financial adviser and SMSF accountant before making any decision.

Frequently asked questions