What is a limited recourse borrowing arrangement?

The Superannuation law was amended from September 24 2007 to allow SMSFs to borrow, but only under a limited recourse borrowing arrangement (LRBA), via a Bare Trust. That way, the Bank’s recourse against your SMSF and the Property Trustee can only be limited to the underlying asset i.e. the purchased property.

Limited recourse borrowing arrangement

Your SMSF must comply with the following legislation & rules:

  • The Trustee of your SMSF may be an individual(s) or an incorporated non-trading entity (A Corporate Trustee)
  • The purchased property is held by a separate holding Trust. The purpose of this requirement is to help protect the other assets of your SMSF if the loan is in default and the lender seeks recompense to satisfy the debt owed by your SMSF. So, the Property Trustee purchases the property (subject to finance approval) for an investment property from an arm’s length vendor and becomes the legal owner. The property must be held on Trust for your SMSF by the Property Trustee. The Property Trustee must be a company and not an individual. On settlement, the Property Trustee will mortgage the property to the Bank. The Trustee of the SMSF must NOT purchase the property. So, if the property is located in Victoria, then on the contract of sale simply put “and/or nominees”, so can be amended by your solicitors prior to settlement.
  • NB: You need a new Bare Trust for each property asset, so if you want to buy multiple properties then you need multiple Bare Trusts.
  • The Property Trust Deed is the main document between the SMSF Trustee and the Property Trustee. There may also be an “Ownership Certificate” between the Property Trustee and the SMSF Trustee. These documents confirm that upon the purchase of the property, the Property Trustee holds the legal interest in the property on behalf of the SMSF Trustee which holds the beneficial interest.
  • Your SMSF applies for a loan, and proves appropriate structures are in place
  • The borrowed funds are applied for the purchase of a ‘single acquirable asset’ i.e.:
  • A single asset such as a property or
  • A collection of assets, all of which are identical and each with the same market value (e.g. a parcel of BHP shares) – this collection of assets must be treated and traded as a single asset and therefore the individual assets cannot be sold down over time
  • You cannot use borrowed money to improve or develop a property. Instead, you use funds held in your SMSF to do this.
  • You may not substantially change the nature of the property – for example, subdivide or develop a property, which may include rezoning or multi-development.
  • Your SMSF’s Solicitor acts on the purchase in the usual way
  • Your SMSF pays the deposit on the property, the balance purchase money (less the amount borrowed), the legal costs, and stamp duty in the usual way.
  • Your SMSF holds a beneficial interest in the asset that is held within the Bare Trust
  • The Bank lends to your SMSF. Your SMSF has a right to acquire legal ownership of the asset, generally after the repayment of the loan
  • When loan is paid out in full and mortgage is discharged, title to the property can be transferred to your SMSF or the Property Trustee can continue as registered proprietor for the purpose of disposing of the property.

About the author

Matt Carra

Matt Carra

Matt Carra is the Owner of Blue Key Finance, a Finance Broker since 2004, an SMSF Lending Specialist, a Property Investment Educator, and a Mentor to new Finance Brokers entering the finance industry. Matt is passionate about providing valuable guidance and honest advice, educating Australians on how to buy their first homes and invest successfully while protecting them with knowledge. Matt has strong long-term relationships with his panel of lenders and extensive knowledge on their credit policies, and utilises that skillset to give you peace of mind by recommending you to the right lender the first time, to negotiate a better deal, and to fight for your cause – that’s Matt’s commitment to you. Contact Matt today to start the conversation on 0425 726 538 or email matt.carra@bluekeyfinance.com.au