Limited Recourse Borrowing Arrangement

Last updated: July 2026 · Reviewed by John Pierre Saliba, Director and Mortgage Broker, MFAA Accredited

What Is a Limited Recourse Borrowing Arrangement?

A Limited Recourse Borrowing Arrangement (LRBA) is the legal structure that allows a self-managed super fund to borrow money to acquire an asset, typically property. The "limited recourse" component is critical: it means that if the SMSF defaults on the loan, the lender's recourse is limited solely to the asset being purchased. The lender cannot pursue other SMSF assets (other investments, cash holdings) or the personal assets of fund members and trustees.

This protection for other fund assets is what makes the LRBA framework acceptable under superannuation law, borrowing is only permitted in a structure that ring-fences the risk to the specific asset being acquired.

How an LRBA Works, Step by Step

• 1. SMSF identifies a property to purchase
• 2. Bare trust established: A solicitor prepares a bare trust (holding trust) deed. The bare trustee holds legal title to the property as custodian for the SMSF
• 3. SMSF applies for a loan: The loan is in the SMSF's name (or the bare trustee's name, depending on lender), not the members' personal names
• 4. Settlement: The bare trustee takes legal title to the property at settlement. The SMSF is the beneficial owner, it receives all income and pays all costs
• 5. During the loan: All repayments come from the SMSF bank account. No improvements to the property are permitted
• 6. Loan repaid: Legal title transfers from the bare trustee to the SMSF. In most states this transfer attracts no stamp duty

The Bare Trust, Why It Exists

Under superannuation law, an SMSF cannot legally own a property that's subject to a borrowing arrangement, because if it did, the lender's claim would extend to a super fund asset, undermining the limited recourse principle. The bare trust solves this by having a separate legal entity hold the title, while the SMSF holds all the beneficial (economic) rights.

The bare trust deed must be prepared by a qualified solicitor before settlement, not after. Errors in the bare trust structure can create stamp duty liability at the time of title transfer and potential ATO compliance issues.

What Can and Cannot Be Done Under an LRBA

• Permitted: Repairs and maintenance to the property
• Permitted: Leasing to unrelated parties (residential)
• Permitted: Leasing to related parties at market rent (commercial/business real property)
• Permitted: Refinancing the LRBA loan to a better rate (within the same asset)
• NOT permitted: Capital improvements, extensions, additions, conversions that change the character of the asset
• NOT permitted: Members or relatives using or living in residential property
• NOT permitted: Replacing the asset with a different asset using the same LRBA
• NOT permitted: Using the property as security for any loan other than the LRBA

ATO Arm's Length Rules for LRBAs

The ATO requires that all LRBA terms be on arm's length commercial terms. This became particularly important after the ATO's 2016 PCG 2016/5, which sets out safe harbour interest rates and terms for related-party LRBAs (where a related party lends money to the SMSF rather than a bank). For third-party (bank) LRBAs, commercial terms are automatically satisfied.

For related-party LRBAs: interest rates must be at or above the safe harbour rate published by the ATO (updated annually), and loan terms must mirror commercial lending terms. Using related-party LRBAs without meeting these requirements risks the arrangement being treated as non-arm's length income, taxed at 45%.

Refinancing an LRBA

You can refinance an LRBA to a better rate or different lender, provided the refinancing relates to the same asset and doesn't increase the loan balance beyond the original amount borrowed. Refinancing at a lower rate is straightforward and a good use of a broker review. We regularly help SMSF clients refinance their existing LRBAs to current market rates.