Yes, but under strict conditions. An SMSF can borrow to acquire a single acquirable asset under a limited recourse borrowing arrangement (LRBA) as set out in section 67A of the Superannuation Industry (Supervision) Act 1993. The arrangement requires a specific legal structure and must comply with detailed rules about what can be acquired, how the loan is structured, and what happens if the borrower defaults.
Under an LRBA, the asset being acquired is held by a separate trust, called a bare trust or holding trust, until the loan is fully repaid. The bare trust holds legal title to the asset on trust for the SMSF. Once the loan is repaid, the SMSF trustee has the right to have the asset transferred from the bare trust to the SMSF. The purpose of this structure is to ensure the lender’s recourse is limited to the asset being acquired. They cannot claim against the other assets of the SMSF.
The asset must be a ‘single acquirable asset.’ This means you cannot borrow to acquire multiple properties under one LRBA, and borrowed money cannot be used to improve the asset. The fund may improve the asset using its own money, but not so substantially that it becomes a different asset (for example, building a house on vacant land). The asset must also be permitted under the fund’s investment strategy and must not breach the in-house asset rules.
The loan terms must be on arm’s length terms. For related party loans (for example, a member lending to their own SMSF), the ATO’s safe harbour terms in PCG 2016/5 (with an interest rate updated each year) set out terms the ATO will accept as arm’s length. Using them is optional, but loans on other terms need to be shown to be arm’s length.
CoSec Partners prepares SMSF bare trust deeds for $473 including GST, drafted and signed off by Key Legal, an independent external law firm. The bare trust deed is specific to the LRBA and names the relevant parties, property, and loan arrangement. We recommend that members obtain independent financial and legal advice before entering into an LRBA.
Frequently asked questions
Can an SMSF borrow to buy more than one property?
Not under a single LRBA. The rules require a single acquirable asset per arrangement, so each property needs its own borrowing, its own bare trust, and its own documentation. Structuring two properties under one arrangement is a common and serious error.
Can an SMSF renovate a property held under an LRBA?
Repairs and maintenance can be funded from borrowed money. Improvements cannot be funded from borrowings, but may be funded from the fund’s other money provided the asset does not become a different asset. The distinction between repair and improvement is where funds most often get into trouble.
Can a member lend money to their own SMSF for an LRBA?
Yes, but the loan must be on arm’s length commercial terms. The ATO’s safe harbour terms in PCG 2016/5, with an interest rate updated each year, set out terms it will accept as arm’s length. A loan on other terms that cannot be shown to be arm’s length risks the income being taxed as non-arm’s length income at the top rate.
This article is general information only and does not constitute legal, financial, or tax advice. While we endeavour to keep content accurate and current, laws and regulations change frequently. For advice specific to your circumstances, please consult a qualified professional adviser. CoSec Partners Pty Ltd accepts no liability for actions taken based on this content.