How does SMSF borrowing work?
SMSFs are generally not allowed to borrow money.
But there is one exception.
This is where things start to get a bit more structured.
Under specific conditions, an SMSF can borrow through what’s called a Limited Recourse Borrowing Arrangement (LRBA).
If you’re thinking about using your super to invest in property, this is likely the structure you’ll come across.
This guide walks you through how SMSF borrowing works, and what you need to understand before going further.
Can an SMSF borrow money?
Yes, but only under specific rules.
An SMSF cannot take out a standard loan like you would personally.
Borrowing is only allowed through an LRBA.
This structure is designed to limit risk and keep the arrangement within superannuation law.
What is an LRBA?
An LRBA is the structure that allows your SMSF to borrow money to purchase an asset.
Most commonly, this is property.
The key idea behind “limited recourse” is this:
If something goes wrong, the lender’s rights are limited to that specific asset.
They can’t access other assets within your SMSF.
This is one of the core features of how SMSF borrowing works.
How does SMSF borrowing actually work?
It helps to think of this as a structure rather than just a loan.
Here’s how it typically works in practice.
Your SMSF is set up.
A holding trust is established.
The lender provides a loan under the LRBA.
The property is purchased in the name of the holding trust trustee.
From there, your SMSF:
provides the deposit
receives the rental income
pays loan repayments and expenses
Once the loan is fully repaid, the legal ownership of the property can be transferred to your SMSF.
What can an SMSF borrow to invest in?
In most cases, SMSF borrowing is used for property.
This includes:
residential property
commercial property
The asset needs to meet the definition of a single acquirable asset.
This is part of how the rules are applied.
What rules do you need to follow?
This is where structure matters.
SMSF borrowing is tightly regulated, and there are a few key rules that need to be in place.
1. Single acquirable asset
The loan needs to relate to one asset.
This is usually a single property.
2. Holding trust structure
The asset needs to be held in a separate holding trust until the loan is repaid.
This is not optional. It’s part of the structure.
3. Commercial terms
All loan terms need to reflect market conditions.
This includes:
interest rates
repayment terms
security
If they don’t, it can create tax issues.
4. No personal use
If the asset is property:
it must be held as an investment
it cannot be used by you or related parties
5. Limits on changes to the asset
While the loan is in place, the asset can’t be fundamentally changed.
For example:
major redevelopment
altering the nature of the property
These can create compliance issues.
What costs are involved?
Borrowing through an SMSF usually comes with additional costs compared to a standard purchase.
This can include:
loan setup costs
legal documentation (including the holding trust)
ongoing loan expenses
The exact costs depend on the structure and lender.
Where things usually go wrong
This is where we often see issues.
For example:
setting up the structure after signing the property contract
incorrect holding trust setup
loan terms that don’t reflect market conditions
missing or inconsistent documentation
treating the arrangement like a standard property loan
These are difficult to fix once things are already in motion.
Why the ATO pays attention to this
SMSF borrowing is an area of ongoing focus.
This includes:
how the structure is set up
whether loan terms are commercial
whether documentation is aligned
how the asset is being used
Trustees are responsible for making sure everything complies.
Why structure matters
This is not just about getting a loan approved.
It’s about setting up the structure around it properly.
When the structure is right:
compliance is easier to manage
ownership is clear
future issues are less likely
How we can help
We focus on SMSF setup and compliance.
This includes:
setting up SMSF structures in line with requirements
establishing holding trust arrangements correctly
preparing and aligning documentation
supporting ongoing compliance and reporting
If you would like to understand how SMSF property structures work, you can speak with our team.
We are a specialised accounting firm focused on SMSF, with over 20 years of experience working with investors. We have supported 300+ SMSF setups.
Our work focuses on structure and compliance, particularly for property and LRBA arrangements.
If you’re thinking about using your super for property, it’s worth understanding how this applies to your situation.[Book a Free Consultation]
Disclaimer
Real Accounting does not hold an Australian Financial Services Licence (AFSL) and does not provide financial product advice. This article contains general information only and does not take into account your objectives, financial situation, or needs. Before establishing an SMSF or implementing any borrowing arrangement, you may wish to seek advice from a licensed financial adviser to assess whether it is appropriate for your circumstances.
