Understanding limited recourse borrowing arrangements for SMSFs

Many self-managed superannuation funds (SMSFs) invest in significant assets, including property. If an SMSF is looking to acquire an asset but it does not have a sufficient cash balance to buy it outright, one solution is a Limited Recourse Borrowing Arrangement (LRBA).

What is an LRBA?

As a general rule, superannuation funds are not allowed to borrow, except in limited circumstances. One of the occasions where an SMSF can borrow, however, is where it meets the strict requirements of an LRBA. Whilst there are many conditions to be satisfied in obtaining an LRBA, it can be worthwhile to expand the SMSF’s investment options – while keeping within Australian super investment rules and regulations – and can be a strategic choice for SMSFs looking to invest in property or other significant assets.

Requirements for an arrangement to qualify as a compliant LRBA:

Single acquirable asset:

The borrowed funds must be used to purchase a single asset the SMSF could have otherwise bought outright, if they’d had the money available. In addition, the asset must be one that will not fundamentally change its character so long as the borrowing is in place. For this reason, an LRBA is not a suitable mechanism for an SMSF to acquire vacant land intended for development. Once vacant land has been built on, it is no longer considered the same “single acquirable asset” that was funded by the borrowing.

Separate legal title:

The asset must be held in a separate legal entity from the SMSF trustee. Typically, this involves setting up a special purpose company to hold the asset’s title until the loan is repaid.

Limited recourse:

The loan must be limited in recourse, meaning if the SMSF defaults, the lender’s recourse is limited to accessing the asset purchased with the loan, with the SMSF’s other assets and investments protected.

Interest rates and lender terms

Because of the limited recourse nature of an LRBA, these arrangements typically attract an interest rate 2%–3% higher than what you would expect to see for a loan that is not limited recourse in nature.

If the lender is a party related to one of the super fund’s members – such as a discretionary trust – an LRBA can still be an option. However, there are some strict requirements in Australian superannuation investment rules that must be met to ensure that any related party borrowing is kept strictly on an arm’s length basis.

Strategic considerations with LRBAs for self-managed super funds

Establishing an LRBA can be complex and requires careful planning. It should align with your fund’s financial goals and investment strategies and must comply with Australian superannuation laws. SMSF accountants play a crucial role in ensuring that your super fund’s borrowing meets both regulatory standards and your wealth accumulation objectives, particularly when considering broader super investment options and performance.

At LDB, we assist a range of clients with their SMSF strategies, including the setup and management of LRBAs. Our expert accountants and advisors at LDB Superannuation Services are well-equipped to guide you through the intricacies of LRBAs, ensuring your arrangement is built to align with expectations for your SMSF’s investment performance and is fully compliant.

Contact the Superannuation team at LDB today on (03) 9875 2900 to discuss LRBAs or any other Superannuation enquiries with one of our friendly staff.