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Glossary

Limited recourse borrowing arrangement (LRBA)

Also called: LRBA

An LRBA is the structure through which an SMSF can borrow to acquire a single asset. The asset is held on trust, and if the loan defaults the lender's recourse is limited to that asset rather than the fund's other assets.

An example

An SMSF buys the commercial premises its members' business operates from through an LRBA. A bare trust holds the title, the fund makes the repayments, and the lender's security is limited to the property.

Why it matters

LRBAs have specific rules about what can be bought, improvements and refinancing, and the ATO reports that new arrangements for real property are now limited to business real property. Breaching the rules can have serious tax and compliance consequences for the fund.

Points to check

SMSF borrowing must meet strict superannuation rules about the single acquirable asset, the holding trust and what the borrowed money can be used for. Ask your accountant whether the fund's trust deed allows borrowing and whether the investment strategy supports it. Check whether the lender requires personal guarantees from members. Compliance mistakes can be costly, so get specialist advice before signing a contract.

Read about smsf property lending

Related terms

Further reading: Australian Taxation Office