How Does a Limited Recourse Borrowing Arrangement (LRBA) Work in an SMSF?
Winding up an SMSF involves paying out or rolling over all member benefits, finalising the fund's investments, completing a final audited financial return, deregistering any special purpose trustee or custodian company where applicable, and retaining the fund's permanent records after the fund is closed.
What types of investments can an LRBA now be used to buy?
Since 10 August 2026, a new LRBA can only be used to acquire business real property, land and buildings used wholly and exclusively in one or more businesses, including a related party's business, provided it's dealt with at arm's length. Residential property can only be acquired using a new LRBA, if that property also meets the definition of Business Real Property. An SMSF can still buy any residential property outright with cash, it simply can't borrow to do so through a new arrangement unless it also qualifies as Business Real Property. For example, where land is used for primary production, it can still qualify as business real property, provided any dwelling on it stays within a limited area and the predominant use remains genuinely business rather than lifestyle or hobby use.
What happens to LRBAs already in place before 10 August 2026?
Existing residential property LRBAs entered into before the commencement date are fully grandfathered. There's no forced sale, no loan-to-value ratio reset, and no compliance issue arising solely from the new legislation. These arrangements can continue to be serviced and can generally be refinanced on substantially the same terms without losing their grandfathered status. A refinance involving a top-up, equity release, or a change to the underlying security may be treated as a new arrangement and become subject to the current restrictions, so this is worth checking carefully before refinancing.
What is a custodian company and why is it needed?
Under an LRBA, the asset being purchased is held by a custodian company (sometimes called a bare trustee), separate from the SMSF trustee, until the loan is repaid or the asset is otherwise dealt with. This structure limits the lender's recourse to the single asset held.
What documents does an SMSF auditor require for an LRBA?
Auditors typically require the loan agreement, custodian deed, custodian company register, purchase and settlement documents, loan account statements, and each year's evidence supporting the property and the loan balance.
What happens to the LRBA when the loan is repaid?
Once the loan is fully repaid, the property is generally transferred from the custodian company back to the SMSF trustee through a vesting deed, and the custodian company is often deregistered if it's no longer required.
What are the risks trustees need to consider before borrowing?
Trustees need to consider liquidity in case of unexpected costs or vacancy, whether they have the capacity and eligibility to make additional contributions if needed, adequate insurance, and how a fall in the property's value could affect the fund's overall position.
Frequently asked questions
Can my SMSF still buy residential property using an LRBA?
From 10 August 2026, residential property can only be purchased using an LRBA if that property also meets the legislative definition of Business Real Property.
Can I still buy residential property with my SMSF at all?
Yes, an SMSF can still purchase residential property outright with cash. Only residential property purchases using borrowed money through a new LRBA are restricted to Business Real Property.
Can I refinance my existing residential LRBA?
Generally yes, on substantially the same terms, without losing grandfathered status. A refinance that involves a top-up, equity release, or a change to the security may be treated as a new arrangement and become subject to the current restrictions.
Considering an LRBA for your SMSF, or have an existing one you're reviewing? Contact Lifetime SMSF on 1300 031 943 or visit lifetimesmsf.com.au.
This information is general and factual in nature. It is not financial product advice, legal advice or tax advice. Lifetime SMSF Pty Ltd is not licensed to provide financial product advice under the Corporations Act 2001. If you require personal advice, consult an appropriately licensed or authorised financial adviser.