Limited Recourse Borrowing Arrangement (LRBA) and Holding / Bare Trusts

This article is an overview of the Limited Recourse Borrowing Arrangement (LRBA) and Holding Trust (aka Bare Trust, or Property Trust).


A trustee of a Self-Managed Superannuation Fund (SMSF) is allowed to borrow money, and maintain a borrowing, provided the borrowing is made pursuant to a Limited Recourse Borrowing Arrangement (LRBA).

An LRBA is where a SMSF trustee takes out a loan from a third-party lender and then uses those funds to purchase a single asset (or multiple identical assets holding the same market value) to be held in a separate trust. An LRBA entered into from 7 July 2010 must strictly comply with ss 67A and 67B of the Superannuation Industry (Supervision) Act 1993 (Cth) (The SIS Act) and other superannuation rules such as 67A(2)(b) of the SIS Act.

The SIS Act does not specify the kind of trust that must be used in a LRBA. It does provide, however, that the SMSF trustee must acquire a beneficial interest in the asset and a right to acquire legal ownership of that asset by making one or more payments. These requirements are best met by a holding/bare Trust. 

Before establishing a LRBA, a SMSF trustee should obtain detailed advice from a specialist/lawyer so that they can plan ahead, in order to avoid any adverse tax or stamp duty implications in the future.

Borrowing arrangement

The borrowing arrangement and holding trust documents must clearly reflect a genuine borrowing to acquire the asset, and care must be taken to ensure that the relevant contracts and documents are properly executed.

The ATO will generally accept that a related-party LRBA is consistent with an "arm's length" transaction, and therefore the non-arm's length income (NALI) provisions not triggered, as long as the loan meets the Commissioner's "safe harbour" terms. The terms and conditions in the Practical Compliance Guideline include benchmark interest rates, maximum loan rates, maximum loan to market value ratios, security requirements, nature and frequency of repayments, and the existence of a written and executed loan agreement. 

Note: If NALI is triggered the income generated from the LRBA asset is taxed at 45%.


Unfortunately, however, PCG 2016/5 considers only two types of scenarios: SMSF borrowing for the purchase of real property and SMSF borrowing to buy listed shares/units in a trust. So, how about other situations like where a SMSF borrowing from a related party to purchase other types of assets? The crux of it is that the onus is on the SMSF trustee to demonstrate that the related party loan was entered into and maintained on terms consistent with arm's length dealing. This can be demonstrated by, for example, the SMSF trustee seeks finance from a bank (or other commercial lender) and the trustee then benchmarks the terms and conditions of the loan to an offer (cf a quote, which may be seen as insufficient) made by the financial institution in relation to the particular asset. The alternative may be to seek a private ATO ruling. 


If the LRBA does not meet all of the safe harbour terms, however, it does not necessarily mean the borrowing is deemed not to be on arm's length terms, but it will not be certain as to whether the Commissioner will accept the arrangement as being consistent with an arms' length dealing. In this situation, SMSF trustees should maintain evidence to otherwise demonstrate that the terms of the arrangement were otherwise consistent with an arm's length commercial dealing. The ATO may consider the LVR, regularity and frequency of repayments required, security taken etc. 

The SMSF trustee should not be named as the purchaser on the contract of sale, given that the SIS Act requires the acquirable asset to be held on trust. This means that the SMSF trustee acquires only a beneficial interest in the acquirable asset and, as such, the corporate trustee of the holding trust (or the holding trustee) serves as the legal owner of the property, holding it for the ultimate benefit of the SMSF trustee until the loan is repaid. 

Holding / Bare trust 

The SIS Act does not explicitly state who can or can't be trustee of a holding/bare trust for the purposes of an LRBA. However, the holding/bare trust's trustee cannot be the same individual or corporate trustee of the SMSF. In saying that, individual trustees of an SMSF can be trustees of the holding/bare trust in their personal capacity (i.e. other than as trustee of the SMSF) but not all of the SMSF's trustees because that would mean that the same entity is holding both the legal and beneficial interest for themselves. 

Using a separate company ('standard company', available on the NowInfinity platform) as the holding/bare trust's trustee is ideal (and some banks/financial institutions might in fact require the trustee to be a company) as it helps to provide a clear separation to the legal title to the asset (in compliance with reg 4.09A of the SIS Regulations) i.e. prevent any potential "mixing" with the assets that the SMSF trustee or its members hold in their personal capacity (if applicable), and also to avoid potential issues associated with the situation where an individual trustee dies. 

The trustee of the holding/bare trust has no active duties in relation to the trust, other than to follow the directions of the beneficiary/SMSF trustee. It is generally recommended that the holding trust trustee should not obtain its own ABN, TFN or bank account. 

Further Information

How to Access the Limited Recourse Borrowing Arrangement (LRBA) Suite on NowInfinity

Holding/ Bare Trust FAQs

Which documents are included in the LRBA Suite?


Note: This article provides only general information and is not to be relied on as legal advice. Due to the complexity involved with LRBAs, we recommend that you engage with a licensed specialist/professional to assist in its set up in order to ensure its compliance with the tax and superannuation borrowing rules. 


Disclaimer: You acknowledge and agree that our Services and Materials do not constitute or contain personal or general advice for the purpose of the Corporations Act 2001 (Cth) and that we, our employees and advisers do not offer any legal, accounting, tax or other professional advice or services in connection with the provision of our Services and any Materials.





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