Limited recourse borrowing arrangements.
Understanding LRBAs and their place within SMSF property investment
Does Limited Recourse Borrowing Arrangement (LRBA) feel foreign to you? Our
comprehensive guide will make LRBAs feel like home, providing the specific
information you need to better understand how self-managed superannuation funds use them — and why.
What’s a Limited Recourse Borrowing Arrangement?
LRBAs are how Self Managed Super Funds (SMSF) lend money to buy an asset. You may consider LRBA a special loan type designed to disallow the lender access to the super fund’s other assets should the fund default on the loan. This unique characteristic makes limited recourse borrowing different from other lending arrangements.
Generally, when a borrower defaults on loan repayments, the lender often has access to a range of other assets as recourse. With LRBAs, if the fund defaults, the lender’s recourse is strictly limited to the property (or another single asset) that the SMSF loan was used to purchase.
LRBAs at a glance
Looking to grow your portfolio and diversify your SMSF assets through acquiring Residential or Commercial Property? Here are some of the key aspects of purchasing property with an LRBA.
- LRBAs help protect your SMSFs other assets from lenders in the case of defaulting — safeguarding your retirement balance.
- Allows you to diversify your assets which may increase your investment return and mitigate risk.
- You can access capital gains tax (CGT) concessions after you hold the property for more than twelve months.
- Aids in reaching your retirement goals sooner by directing some concessional contributions into your super as loan repayments.
- LRBA rules prohibit any property development lending under SMSF or within an SMSF trust structure.
- You aren’t able to use borrowed funds to change to the property as this would constitute a ‘new asset.’ However, you can use cash from the SMSF to improve the house or use borrowed funds to renovate the house in line with ATO guidelines.
How does a Limited Recourse Borrowing Arrangement Work?
LRBAs are the only option for borrowing money within an SMSF to purchase residential or commercial property. This is because the trustees of SMSFs aren’t permitted under the Superannuation Industry (Supervision) Act 1993 (SIS Act) from borrowing money via any other arrangement. The SIS Act is the piece of Australian legislation that determines how SMSFs are allowed to borrow money.
To facilitate an LRBA, a Bare Trust needs to be established. Essentially, a Bare Trust is an empty trust which is legally set up purely to own the property being purchased on behalf of the SMSF trustee. The rules related to LRBAs are very strict, with the ATO considering the purchase of an asset under the bare trust the ‘single acquirable asset’. Therefore, if the SMSF wishes to further invest in commercial or residential property, it will need to establish a separate Bare Trust with a separate LRBA to fund borrowings.
Why is it important to seek specialist LRBA lending advice?
There’s a lot to consider when investing in property. If you’re planning to acquire either a residential property or commercial property through your SMSF, the purchasing process can become complex very quickly. Compared to personal lending, the technicalities are significantly more complicated when you add limited recourse borrowing and SMSF entities into the mix. At SMSF Loan Experts, we leverage our thorough understanding of the entire SMSF landscape to guide you through your LRBA journey. Our comprehensive knowledge of SMSF establishment, law, taxation, asset and trust structures provides you with expert navigation and support.
Our specialist knowledge can also help you avoid some of the downsides to property investment within your SMSF, such as:
- Incurring fines due to becoming lost amongst the thick and ever-changing SMSF and superannuation legislation.
- The potential for borrowing money to affect the SMSFs ability to meet member benefit obligations