The easiest way to set up an SMSF loan structure

What a Limited Recourse Borrowing Arrangement Actually Is

A Limited Recourse Borrowing Arrangement lets your Self-Managed Super Fund borrow to buy property, but the loan can only claim the property itself if things go wrong. The structure isolates the borrowed asset in a bare trust separate from the rest of your fund. If repayments stop, the lender takes the property, not your other super assets.

The structure involves three parts: your SMSF as trustee, a bare trust that holds legal title to the property, and the lender. Your fund borrows the money, directs the bare trustee to buy the property, and makes repayments from rental income or member contributions. Once the loan clears, legal title transfers to your SMSF. Until then, the property sits in the bare trust and your fund holds the beneficial interest.

Each loan covers a single property in a separate bare trust, so two properties means two separate arrangements. You cannot bundle multiple assets under one LRBA, and you cannot cross-collateralise.

Why the Bare Trust Exists and What It Can't Do

The bare trust is not optional. It's the legal structure that satisfies the limited recourse rule under superannuation law. The bare trustee holds legal title, but your SMSF controls the asset. The trustee cannot act independently or make decisions about the property without instruction from your fund.

Consider a mining engineer with a fund holding $400,000 who borrows to acquire a commercial property leased to a logistics company. The property sits in a bare trust with a corporate trustee named specifically for that asset. The SMSF trustees direct all decisions, the bare trustee executes them, and the lender's security is limited to that one property. If the fund defaults, the lender cannot pursue other assets in the SMSF, including cash reserves or shares.

You cannot use the loan to fund structural improvements or anything that changes the fundamental character of the property while the loan is outstanding. Repairs and maintenance are allowed, but adding a second storey or converting a warehouse to office space is not. The asset purchased with the LRBA must remain the same single acquirable asset throughout the loan term.

LRBA Structure for Commercial Property After the Residential Ban

Commercial property LRBAs are unaffected by the ban introduced on 23 June 2026. SMSFs can still borrow to purchase business real property, including industrial sheds, retail premises, and office space used wholly and exclusively in a business.

Non-bank and specialist lenders are offering LVRs up to 80% for commercial property investments, though most sit between 65% and 75% depending on asset class. Industrial property typically attracts higher LVRs than retail because vacancy risk and tenant turnover are lower. Lenders will assess the property's income history, lease terms, and tenant credit quality before determining how much they'll lend.

The property must meet the sole purpose test, meaning it exists purely to generate retirement benefits for fund members. You cannot lease the property to yourself or use it personally. If you lease it to a related party such as your own business, the property becomes an in-house asset and your fund is restricted from holding more than 5% of total assets in this category unless specific exceptions apply. Most SMSF loans for FIFO workers involve properties leased to unrelated commercial tenants to avoid this limit.

How Lenders Assess LRBA Applications Now

Lenders prioritise fund liquidity over individual member income. Your SMSF must demonstrate it can service the loan from rental income, member contributions, or existing cash reserves. If the property sits vacant for three months, the fund needs enough liquidity to cover repayments without breaching cash flow requirements or forcing asset sales.

Lenders now expect a cash buffer of 5-10% of the asset value post-settlement. That buffer covers unforeseen expenses such as tenant default, urgent repairs, or periods without rental income. A fund borrowing $500,000 to buy a $625,000 commercial property should retain at least $30,000 to $60,000 in accessible cash after settlement, separate from the deposit.

Fund size matters. A fund with $200,000 in total assets will struggle to satisfy liquidity and borrowing capacity requirements for a $500,000 loan, even with a 20% deposit. Lenders want to see the fund can absorb repayment obligations without jeopardising compliance or member retirement outcomes. Contribution history, investment returns, and projected rental yield all factor into the assessment.

Safe Harbour Rates and Arm's Length Terms

If your SMSF borrows from a related party such as a family member or company you control, the loan must meet arm's length terms or risk penalties. For the current financial year, the safe harbour interest rate for LRBAs used to acquire real property is 8.95%. Charging below this rate without commercial justification may trigger compliance action.

The safe harbour rate is not a cap. It's a floor for related-party loans. If your fund borrows from an external lender, the rate will depend on the lender's assessment of risk, fund liquidity, and asset quality. Commercial lenders typically price LRBAs above standard investment loan rates because of the structural complexity and limited recourse nature of the security.

Loan terms must be documented in writing with a formal agreement that includes repayment schedule, interest rate, and security details. The ATO monitors related-party LRBAs closely, and any arrangement that appears designed to shift value between the fund and a related party will attract scrutiny.

Trustee Training and Compliance from Here

New rules require trustees, both new and existing, to complete certified training covering LRBAs, related-party transactions, cash flow planning, and compliance obligations. Non-compliance may result in penalties of up to $19,800, or even fund disqualification.

SMSFs with borrowing arrangements face heightened data-matching and transaction-monitoring. The ATO cross-references loan repayments, rental income, and contribution records to confirm the fund operates within the law. Trustees must ensure rigorous record-keeping, including all trust deeds, loan agreements, bare trust documentation, and financial statements.

If you hold an existing residential LRBA, your arrangement is fully grandfathered, including concessional tax treatment of 15% on rental income and an effective 10% CGT discount in accumulation phase. Refinancing may be possible, but whether a refinance is treated as a new LRBA is not yet settled by the ATO. Don't restructure without specific legal advice or you risk losing grandfathered status.

The structure works, but only when set up with precision and maintained to the letter. If you're holding substantial super and considering property as part of your retirement strategy, call one of our team or book an appointment at a time that works for you.

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