Borrowing inside superannuation is one of the most powerful strategies available to SMSF trustees. Done correctly, a Limited Recourse Borrowing Arrangement (LRBA) lets your fund acquire an asset worth far more than its current cash balance, while keeping that asset's income and eventual capital gain inside the low-tax super environment. Done incorrectly, it exposes the fund to penalties, punitive tax rates, and regulatory scrutiny that undoes everything you were trying to achieve.

This article covers how LRBAs work, the legal structure required, the rules you cannot bend, and how to think about whether borrowing inside super makes sense for your situation.

What Is an LRBA?

A Limited Recourse Borrowing Arrangement is a loan an SMSF takes out to buy a specific asset. The "limited recourse" part is the key feature: if the fund defaults, the lender can only take the single asset purchased with the borrowed money. Every other SMSF asset is protected. This protection does not happen automatically; it requires a specific legal structure set up correctly before settlement.

The most common application is residential or commercial property, but LRBAs can also be used to purchase listed shares or units in a registered managed investment scheme. The current framework sits under sections 67A and 67B of the Superannuation Industry (Supervision) Act 1993 (SIS Act), introduced in 2010, and the ATO has increased its compliance focus on this area significantly in recent years.

How the Bare Trust Structure Works

An LRBA involves two separate entities: the SMSF and a bare trust (also called a holding trust). When the SMSF borrows to buy a property, legal title does not sit in the SMSF's name. Instead, a bare trustee holds legal title on behalf of the SMSF. The SMSF holds the beneficial interest, meaning it receives the rental income, pays the expenses, and benefits from any capital growth. The bare trustee holds legal title until the loan is fully repaid, at which point it transfers to the SMSF.

The parties and documents involved in a properly structured LRBA include:

  • SMSF trustee: Holds the beneficial interest in the asset and manages the fund
  • Bare trustee: A separate legal entity that holds legal title to the asset and acts only on the SMSF trustee's instructions
  • Bare trust deed: The legal document establishing the bare trust arrangement
  • Loan agreement: Documents the borrowing terms between the lender and the SMSF
  • Property contract: Names the bare trustee as the purchaser at settlement

The bare trustee and the SMSF trustee must be different legal entities. Most lenders require both to be corporate trustees, which means establishing a separate company to act as bare trustee before the purchase completes. Once the loan is repaid, legal title can generally be transferred to the SMSF without triggering capital gains tax or stamp duty in most states, provided the structure was set up correctly from the outset. Retrospective fixes are significantly more expensive and may not be possible.

The Single Acquirable Asset Rule

An LRBA can only be used to acquire a single acquirable asset. A single acquirable asset generally means one property title, one parcel of identical shares, or a collection of assets that are identical and have the same market value. You cannot use one LRBA to purchase two separate properties, and each asset acquired under a borrowing arrangement requires its own bare trust and loan agreement.

The rule also affects improvements. Once an asset is acquired under an LRBA, you cannot use borrowed funds to improve it. Maintenance and repairs funded from existing SMSF cash are permitted, but capital improvements using a new or extended loan are not. The ATO's ruling SMSFR 2012/1 sets out how the single acquirable asset test applies across different scenarios.

Deposit Requirements

Banks and specialist lenders typically require a deposit of 20% to 30% of the purchase price, meaning loan-to-value ratios of 70% to 80%. Before the purchase settles, the fund also needs liquid assets outside the LRBA to cover ongoing expenses: loan repayments, rates, property management fees, insurance, the annual SMSF audit, and tax obligations. Trustees who stretch liquidity to meet the deposit and then have no buffer for operating costs create ongoing compliance risk.

Most SMSF advisers recommend a combined member balance of at least $200,000 for a couple or $175,000 for a single member before an LRBA is economically viable. Below those levels, the fixed costs of running a compliant SMSF combined with the deposit and liquidity requirements make the numbers difficult to justify.

Arms-Length Terms and NALI Risk

This is where ATO scrutiny is most intense in 2025-26. If an SMSF borrows from a related party (a family member, a related company, or another entity controlled by the members), the loan terms must be strictly arm's length: a commercial interest rate, a realistic loan term, proper security documentation, and repayment terms an unrelated lender would offer. The ATO published its safe harbour rules for related-party loans in PCG 2016/5, and compliance with those guidelines provides protection from audit challenge.

If loan terms deviate from arm's length, all income and capital gains from the asset can be reclassified as Non-Arm's Length Income (NALI), taxed at 45% rather than the standard 15% super rate. Critically, the ATO's position under TD 2016/16 is that NALI tainting attaches at the point of acquisition and is permanent. Later refinancing on commercial terms does not remove it.

For any LRBA, the fund's investment strategy must explicitly permit borrowing, and the arrangement must be documented as consistent with the sole purpose of providing retirement benefits to members.

What You Cannot Do Under an LRBA

Several restrictions catch trustees off guard. Before entering into an LRBA, every trustee needs to know that you cannot:

  • Improve the asset using borrowed funds. Improvements paid from the fund's existing cash are permitted, but using borrowed money is not, and improvements change the character of the asset requiring careful documentation.
  • Use the asset personally. Residential property must not be occupied by members or related parties, whether purchased outright or through an LRBA. Commercial property can be leased to a related business at market rent under specific conditions.
  • Cross-securitise assets. You cannot offer other SMSF assets as security for the LRBA loan. The lender's recourse is limited to the single acquired asset only.
  • Use a discretionary trust as the holding trust. The bare trust must give the SMSF a defined beneficial interest in the specific asset. A discretionary trust does not satisfy this requirement.
  • Buy an asset from a related party unless it qualifies as business real property. Acquiring assets from related parties is heavily restricted under the in-house asset rules of the SIS Act.

For a broader look at how SMSF ownership compares to other investment structures, see the guide to investment property structuring in Australia.

LRBA vs Buying With Cash: When Does Borrowing Make Sense?

An LRBA is not automatically better than buying outright. The decision depends on the fund's balance, the asset being acquired, and the members' timeline to retirement.

Borrowing inside super tends to make sense when the fund has the deposit and an operating buffer but not enough for an outright purchase, members are younger with a longer runway for growth, the expected return justifies the additional complexity, and the rental yield covers loan repayments without requiring ongoing top-up contributions.

Buying with existing cash is often more appropriate when the fund already has sufficient capital, members are approaching retirement and liquidity matters more than leveraged growth, or the setup and ongoing costs of the LRBA structure outweigh the marginal benefit.

For a detailed comparison of how SMSF property ownership stacks up against personal name, trust, and company structures, read the full guide to SMSF property investment in Australia.

Frequently Asked Questions

Can an SMSF borrow money to buy an investment property?

Yes. An SMSF can borrow to purchase property through an LRBA, provided the property is held in a separate bare trust, the borrowing is limited recourse, the asset qualifies as a single acquirable asset, and the arrangement is consistent with the fund's investment strategy. Residential property cannot be occupied by members or related parties. Commercial property may be leased to a related business at market rent under the business real property rules.

What is the minimum SMSF balance needed before borrowing?

There is no statutory minimum, but most advisers recommend at least $200,000 in combined member balances for a couple or $175,000 for a single member before an LRBA is economically viable. The fund must also hold sufficient liquidity outside the LRBA to cover loan repayments, running costs, insurance, audit fees, and tax obligations. Exhausting available cash on the deposit and having no operating buffer creates serious ongoing compliance risk.

What is NALI and why does it matter for LRBAs?

Non-Arm's Length Income (NALI) is income earned by an SMSF through transactions that are not at commercial terms. In the LRBA context, if a related-party loan carries a below-market interest rate or repayment terms that an unrelated lender would not offer, the ATO can reclassify all income and capital gains from the acquired asset as NALI. The tax rate on NALI is 45%, compared to 15% for ordinary SMSF income and 10% for capital gains in accumulation phase. Critically, the ATO's position is that NALI tainting attaches to the asset at the point of acquisition and cannot be reversed by later refinancing on commercial terms. The safe harbour rules in PCG 2016/5 provide protection when related-party loan terms meet specific benchmarks.

The Bottom Line

An LRBA is a genuinely useful strategy for SMSF trustees who want to acquire a higher-value asset and have the balance to support the structure. But the rules are precise, the documentation requirements are substantial, and the ATO's focus on this area is sharper than ever heading into 2025-26.

Getting the bare trust structure wrong, using related-party loan terms that do not meet the safe harbour, or failing to document the investment strategy can turn a legitimate strategy into a costly compliance problem. These are not minor technicalities.

If you are considering an LRBA, or reviewing an existing arrangement for compliance, the first step is a proper strategy review with a qualified SMSF specialist before you commit to a purchase contract.

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Andrew Romano is a Chartered Accountant and SMSF Specialist based in Sydney. He works with high-income individuals, business owners and investors on tax planning, structuring and self-managed super funds.

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