Borrowing Inside Your SMSF
A self-managed super fund (SMSF) can borrow money to purchase a single acquirable asset - typically residential or commercial property - through a structure known as a limited recourse borrowing arrangement (LRBA). This allows SMSF trustees to leverage the fund's existing balance to access a property asset that would otherwise be out of reach.
SMSF lending is a specialist area with strict compliance requirements set by the Australian Taxation Office (ATO) and regulated by the Australian Securities and Investments Commission (ASIC). Loan Hive works alongside your SMSF accountant, auditor and legal advisers to ensure the loan structure satisfies all regulatory requirements.
Important: SMSF loans are complex financial products. You should always seek advice from a licensed financial adviser and qualified SMSF specialist before proceeding. Loan Hive provides credit assistance only and does not provide financial or superannuation advice.
How an LRBA Works
Under a limited recourse borrowing arrangement, the purchased property is held in a separate bare trust (also called a holding trust or custodian trust) until the loan is fully repaid. The SMSF makes the loan repayments and receives all income from the property, but legal title sits with the bare trustee. Once the loan is discharged, legal title transfers to the SMSF trustee.
The “limited recourse” nature means that if the fund defaults, the lender's recourse is limited to the asset held in the bare trust - the other assets of the SMSF cannot be touched.
Bare Trust Requirements
Setting up the correct bare trust structure before settlement is critical. Key requirements include:
- A separate bare trust deed must be established, with an independent trustee (or corporate trustee) holding the property on behalf of the SMSF
- The bare trustee must be different from the SMSF trustee and must not be a member of the SMSF
- The SMSF must be the borrower and the loan must be documented as an LRBA
- The property must be a single acquirable asset - you cannot subdivide or develop the property while under the LRBA
- The property must satisfy the “sole purpose test” of providing retirement benefits to fund members
Eligible Properties and LVR
SMSF loans can be used for:
- Residential property - houses, townhouses and units. The property cannot be lived in or used by fund members or related parties (this is the “in-house assets rule”). Maximum LVR is typically 70-80% for residential.
- Commercial property - retail, office or industrial premises. Uniquely, a related party (such as the business operated by a fund member) can lease the commercial property from the SMSF at market rent. Maximum LVR is typically 65-70%.
Lenders will also assess the fund's ability to service the loan without relying solely on the rental income. They look at fund contributions, existing fund assets and cash flow to ensure the fund can meet repayments even during vacancy periods.