Purchase Property Through Your SMSF: Demystifying LRBA's

LRBAs (Limited Recourse Borrowing Arrangements) offer a unique means for Self-Managed Super Funds (SMSFs) to acquire assets through borrowed capital. This specific loan type is tailored such that, in the event of a loan default, the lender's access is limited to the purchased asset, providing a layer of protection to the other assets within your SMSF.

Exploring LRBAs: A Quick Rundown

As an SMSF trustee eyeing growth and diversification through residential or commercial property acquisition, here are some critical facets of an LRBA to consider:

• LRBA safeguards your other SMSF assets against lender claims in case of loan default, helping protect your retirement savings.
• Diversifying your asset portfolio through an LRBA could bolster your investment returns and spread your risk.
• Holding a property for over a year enables you to leverage capital gains tax (CGT) concessions.
• You could expedite your journey to retirement goals by channeling some concessional contributions as loan repayments into your super.
• SMSF property development lending is not permitted under an LRBA.
• While borrowed funds can't be used to change the property as it would constitute a 'new asset', SMSF cash can be used to make improvements or renovations as per ATO guidelines.

Understanding the Functioning of LRBAs

LRBAs are the exclusive avenue for an SMSF to borrow money for residential or commercial property purchase, as stipulated by the Superannuation Industry (Supervision) Act 1993 (SIS Act). This legislation delineates how Australian SMSFs are permitted to borrow money.

To facilitate an LRBA, a Bare Trust - an empty trust established purely to hold the purchased property on behalf of the SMSF trustee - is required. The ATO enforces strict rules regarding LRBAs, recognizing the asset purchased under the bare trust as the 'single acquirable asset'. For additional investments in commercial or residential property, a separate Bare Trust along with a separate LRBA would be needed for borrowing.

Navigate Your LRBA with Expert Guidance

Navigating the complex landscape of property investment warrants due diligence, particularly when venturing into residential or commercial property acquisition through your SMSF. Given the intricate dynamics of LRBAs and SMSF entities, the process is substantially more complex than personal lending. For this reason you should seek professional personal advise which will help you avoid: 

• Incurring penalties due to navigating the dense and frequently changing terrain of SMSF and superannuation legislation.
• The possibility that borrowing could impair the SMSF's capacity to meet member benefit obligations.

If you are looking for properties to purchase in your SMSF, it's important that you also find the right combination of financial professionals to help you bring this strategy to fruition. Investing in property can be extremely rewarding and can help to diversify your portfolio, however, there are many things to consider and the right professional help will help you meet all of your obligations as an SMSF Trustee.