Key rules to obey when using an LRBA to buy property in super

Super funds are only allowed to have borrowings in very limited circumstances. One of those is to purchase property, using a limited recourse borrowing arrangement, or LRBA.

Borrowing in your SMSF to acquire property is not the same as borrowing to acquire property in your own name. There are additional requirements to be followed, and failure to follow these can have significant consequences for your SMSF and you as trustee.

A limited recourse borrowing arrangement (LRBA) involves the SMSF taking out a loan from a third party lender. The fund then uses those funds to purchase a single asset to be held in a separate trust, often referred to as a bare trust or custodian trust.

Any rental income earned from the property is paid to the SMSF, not the trust. The super fund also pays for all the loan repayments and expenses.

There are three key rules that need to be followed, not only when establishing the loan, but during the life of the borrowings:

• The super fund cannot borrow to improve the property – any improvements must be paid for with super fund monies.
• The borrowing is permitted over a single asset. This generally means one property title, or say one factory complex that physically sits over multiple titles.
• The asset for which the LRBA is established must not be replaced. If replaced, the LRBA no longer exists. For example, you can’t borrow to buy a vacant block of land in your SMSF then subdivide it into multiple lots. You could do this however, once the loan is fully repaid.

If the loan defaults, 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. This is to protect the other assets of the super fund in case of a default on the loan.

When looking to borrow to acquire property in your SMSF, remember these key rules. Everything also has to be documented and executed correctly, so it’s very important to structure this right to make sure you are complying with the super legislation.

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