Purchasing a residential or commercial property in a SMSF – Limited Recourse Borrowing Arrangement


Prior to 2007, superannuation funds could not borrow money to purchase  an investment. However, the introduction of new borrowing regulations now allows SMSFs to take out a loan to acquire assets including residential and commercial  property. This is done through a Limited Recourse Borrowing Arrangement (LRBA) – where the asset is held in trust, and the liability is  limited to the single asset that is acquired e.g the residential property. An SMSF limited recourse borrowing arrangement typically involves an SMSF taking out a loan from a third party lender or from a related party, such as a member of the fund. The SMSF then uses the loan, together with its own available funds, to purchase a single asset (normally a residential or commercial property) that is held in a separate trust.

The SMSF trustee acquires a beneficial interest in the asset with the trustee of the separate trust being the legal owner of the asset. The SMSF trustee has a right to acquire legal ownership of the asset by making one or more payments.  Any investment income received from the asset goes to the SMSF and if the SMSF defaults on the loan, the lender’s rights are limited to the asset held in the separate trust. This means there is no recourse to the other assets held in the SMSF.


Purpose of funding can be;

  • Purchase of residential investment property
  • Purchase of commercial property for investment
  • Refinance of loans for investment property acquired after 25 September 2007.

Purpose of funding cannot be;

  • Non-commercial related party transactions
  • Investment in “non-income” producing or “going concern” commercial assets, eg vacant land, hotels
  • Finance where relying upon a future development
  • Purchase of rural property for investment

Key Benefits

  • Leverage your superannuation savings  – An SMSF limited recourse borrowing arrangement allows your SMSF to borrow for investment purposes. Borrowing to invest or “gearing” your superannuation savings in this manner enables your fund to acquire a beneficiary interest in an asset that your fund may not otherwise be able to afford (it could be a business premise you own or operate your business from).
  • Tax concessions – Investment income received by your SMSF, including any income received because your fund holds a beneficial interest in an asset acquired under a limited recourse borrowing arrangement, is taxed at the concessional superannuation rates.
  • Asset protection  –  Generally superannuation assets are protected against creditors in the event of bankruptcy. This protection extends to assets that the superannuation fund has acquired a beneficial interest in. Therefore, structuring the acquisition of an asset under a limited recourse borrowing arrangement may provide greater asset protection benefits than may otherwise be the case.

Key Risks

  • Only certain assets can be acquired – Only assets that the SMSF trustee is not otherwise prohibited from acquiring can be purchased under a limited recourse borrowing arrangement. Generally, this means assets that you or a related party currently own cannot be acquired under a limited recourse borrowing arrangement. It is also a requirement that the asset acquired under a limited recourse borrowing arrangement is a single asset.
  • Property alterations and funding improvement costs – Assets acquired under a limited recourse borrowing arrangement cannot generally be replaced with a different asset. In a practical sense this means, during the life of the loan, alterations to a property acquired cannot be made if it fundamentally changes the character of the asset.
  • Cost  – There may be additional costs associated with acquiring an asset under a limited recourse borrowing arrangement. For example, an SMSF limited recourse borrowing arrangement requires a separate trust to be established and the drafting of separate legal instruments such as trust deeds and company constitutions (if the trustee of the separate trust is a corporate trustee). Financial institutions may also charge for vetting your fund’s trust deed, and the limited recourse nature of the loan can mean a higher rate of interest.
  • Liquidity – Loan repayments are required to be deducted from your fund. That means your fund must always have sufficient liquidity to meet the loan repayments.
  • Tax losses and capital gains – Any tax losses which may arise because the after-tax cost of the property exceeds the income derived from the property are quarantined in the fund. This means the tax losses cannot be used to offset your taxable income derived outside the fund. Similarly, the value of a property acquired under a limited recourse borrowing arrangement cannot be used as security for other loans, meaning the value of the property, including the equity built up over time, cannot be used to purchase further properties outside the fund.

Credit Environment

  • SMSF
    • Minimum SMSF net asset position – generally $200,000 + for residential purchase – commercial more flexible – can use up to 100% of funds
    • Residential – Post transaction liquidity requirements
    • Invest up to 100 per cent of their money into a commercial property
    • Larger establishment fees
  • Serviceability
    • Net rent of the purchased property
    • Existing recurring income of the SMSF investments
    • Superannuation contributions where these can be proven to continue – SGC + additional
  • Providers
    • Limited
    • LVR restrictions – residential and commercial
    • Product restrictions
    • Risk rated


  • One of the greatest advantages about having an SMSF is that, ulike with residential SMSF purchases, business owners can purchase a commercial property  and be the tenants to operate their business out of.
  • Your SMSF will be the owner of the commercial property, and your business would be the  tenant paying a market rate of rent to your SMSF.
  • This strategy  increases the retirement balance of the SMSF member, and on top of that, the lease payments are deductible as expenses from the business.

How it works: Limited Recourse Borrowing Arrangement

Limited Recourse Borrowing Arrangement













If you need further support or advice, Equilibria Finance can guide you through this process. 

Anthony Landahl | Equilibria Finance

This is for general information purposes only and does not constitute advice. With all of these options there are a number of considerations outside the scope of what is covered in this article that you need to understand to ensure your personal circumstances are taken into consideration.

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