Self Managed Super Funds (“SMSF’S”) Limited Recourse Borrowing Arrangements (“LRBA”)

Attached is a brief outline of the Self Managed Super Fund (“SMSF”) Limited Recourse Borrowing Arrangements (“LRBA”)

Asset acquired must be held by a Custodial Trustee

The very first requirement is that the asset being acquired, for instance either a residential or commercial property, must be acquired and held by a separate custodian entity preferably a company in bare trust on behalf of the trustee of the SMSF. There is no restriction on this company being controlled by the members of the SMSF.

Asset can only be charged once at the time of acquisition

Security for the loan advance on the property being acquired can only be taken by the lender at the time the asset is being acquired. So if, for instance, the SMSFalready owns other property, those other properties cannot be pledged as security for the purchase of a new property. Likewise once the asset that has been acquired under the new borrowing rules has been paid off, it can never be pledged as security again for the subsequent acquisition of a new asset.

The acquisition by the SMSF must be an acquisition of a Single Identifiable Asset (“SIA”)

More than one title

Changes to the rules in July 2010 now require the acquisition by the SMSF to be the acquisition of a SIA. The acquisition of an apartment for example which has a separate title for the car park and a separate title for the storage unit is not considered to be a SIA where the car park and the storage unit have the ability to be sold off separately to the apartment. The consequence is that the 3 separate titles in this example would be considered to be 3 separate assets and if loan funding was required to fund all 3 separate assets, the finance institution may insist on 3 separate LRBAs. The alternative would be to have the fund pay cash for the car park and storage unit and make available only the apartment title for the loan security.


If the SMSF seeks to undertake a LRBA to fund the acquisition of a parcel of shares, the parcel of shares must be maintained as one parcel and when sold must be sold in the same bundle. So if the SMSF borrows to acquire 10,000 BHP shares it can’t separately sell off 1,000 BHP shares. The whole 10,000 parcel must be sold as one parcel.

Property Improvements

Property improvements are proving some difficulty under the rule changes as the view taken by the ATO is that an improvement to a property may be deemed to create  a separate asset. The SMSF is prohibited from undertaking an improvement of a type that would create a separate asset whilst the existing asset has an outstanding borrowing against it. This prohibition would for example prohibit a SMSF from acquiring a piece land under a borrowing arrangement and then seeking to construct a dwelling on the land whilst the loan on the land remained undischarged, as the improvement created by the dwelling would be considered to be a separate asset to the land.

Available commercial lenders and lending ratios

There are two main commercial lenders amongst many that we believe provide the better lending products on the market.


The NAB lends up to 70% for residential property and 63% for commercial property. The NAB requires that the members of the SMSF provide personal guarantees for the loan taken by the SMSF. The potential impact of this is discussed in the point below.

St George

St George lends up to 72% for residential property and 63% or 65% for commercial property. St George requires that a personal guarantee be given by the members of the SMSF only in some circumstances.

The interest rates and application fees of both the above banks are competitive.

Risk that personal guarantee’s may cause contribution caps to be exceeded

The risk of providing a personal guarantee is that in the event of a default, if the member is asked to pay up the balance of the loan amount and the repayment amount exceeds the contribution caps listed below, the excess would deemed to be excess contributions and potentially taxed by the ATO at the rate of 31.5%, 46.5% or even up to 93%.

  • For members under 65 years of age the non-concessional contribution caps are $150,000 p.a or $450,000 over three years until the member reaches age 65. After age 65 the member is limited to non concessional contribution caps of $150,000 per annum only, provided that a member who is 65 plus meets the work test.
  • For members under 65 years of age the concessional contribution cap is $25,000 p.a without the need to satisfy the work test. After the age of 65 the concessional contribution limit is still $25,000 but the work test must be satisfied.
  • Members older than 75 years of age cannot make any contributions to a SMSF.

The risk that a guarantee could cause a member to exceed their contributions caps can be reduced by ensuring that the guarantor’s right of indemnity (ie its right to be reimbursed from the fund if it is required to repay the loan) is limited to the asset acquired (ie the guarantor cannot seek to be reimbursed from the fund’s other assets).

Funding of the equity in the property

If a commercial lender is willing to only advance 70% of the property value for a residential property the other 30% can be advanced by any of the following alternatives:

  • From the rollover of funds from either another SMSF or a life office fund.
  • From concessional contributions made either by the member or the members employer.
  • From non-concessional contributions made by the member as specified above.
  • From a loan advance made by the member in addition to the loan advance made by the commercial lender which would need to be on similar commercial terms to the loan advance by the commercial lender.

Funding of negative gearing losses

In most cases it is envisaged that the maximum benefit would be obtained under these arrangements where the member or member’s employer made annual concessional contributions into the fund of  $25,000 per annum. The benefit under this arrangement comes from the tax benefit obtained from the tax deduction by the member (if the member is self employed) or the member’s employer (if the member is an employee). The 15% contribution tax in the hands of the SMSF is then limited by the extent of the negative gearing loss in the SMSF.

To obtain maximum tax benefits and ensure that the fund’s cash flow position remains liquid, the level of gearing in the fund has to be moderated to the extent that it does not exceed the level of concessional contribution that the fund can receive under the relevant caps. Whilst the option always exists to top up the funds liquidity with non-concessional contributions, these are nowhere near as tax effective as the concessional contributions, as a tax deduction cannot be obtained from the making of a non concessional contribution.

Your position

We would need to model an example of your position based on the amount proposed to be rolled into the fund and the annual amount of concessional and non-concessional contributions that you anticipate making into the fund, and the level of borrowings the fund proposes to undertake, against the proposed asset to be acquired, having regard to the likely income that the asset is able to generate in its own right. We have developed a modelling tool to provide this level of detailed analysis.


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