SMSF Gearing Solutions in Melbourne

What Is a Limited Recourse Borrowing Arrangement?

A Limited Recourse Borrowing Arrangement (LRBA) is a specific borrowing structure permitted under section 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act). The SMSF borrows funds to purchase a single acquirable asset, which is held in a bare trust (also called a holding trust) until the loan is fully repaid. Once the debt is discharged, the asset is transferred to the SMSF. During the loan period, the SMSF receives the beneficial interest — rental income, capital growth — while the bare trustee holds legal title as security for the lender.

What Are the SIS Act Compliance Requirements for SMSF Gearing?

The SIS Act imposes strict conditions on LRBAs. The borrowing must be used to acquire a single acquirable asset (or a collection of identical assets with the same market value). The asset must not be improved using borrowed funds — only repaired or maintained. The bare trust deed must be established before funds are drawn, and the SMSF's investment strategy must explicitly reflect the gearing strategy. The fund must also satisfy the sole purpose test, ensuring the investment is made for the genuine purpose of providing retirement benefits to members. ATO scrutiny of LRBAs is high, particularly where related parties are involved.

Residential vs Commercial Property — Which Can an SMSF Gear Into?

Both residential and commercial property can be acquired through an LRBA, but the rules differ. Residential property purchased through an SMSF cannot be acquired from, or leased to, a related party of the fund. Commercial property (business real property) can be purchased from a related party at market value and leased back to a related party — a common and legitimate tax-planning strategy for business owners. The fund's 15% tax rate on net rental income, or 0% during pension phase, makes commercial property LRBAs particularly attractive compared with personal ownership.

How Does the ATO View Related-Party LRBAs?

The ATO has issued guidance — including Practical Compliance Guideline PCG 2016/5 — setting safe harbour interest rates for related-party LRBAs. Where an SMSF borrows from a related party (such as a family trust or company) and the loan does not comply with arm's-length terms, the ATO may treat the non-arm's-length income provisions as applying, taxing income and capital gains from the asset at the non-compliance rate of 45% rather than the concessional 15%. Centric Accountants structures related-party LRBAs within ATO safe harbour terms and documents every aspect of the arrangement to withstand audit.

What Lenders Offer SMSF Loans in Melbourne?

SMSF lending is a specialist market. Major banks largely withdrew from SMSF loans following the 2018 banking royal commission, but a range of non-bank lenders and specialist SMSF lenders continue to offer LRBA finance. Typical requirements include a minimum SMSF balance of $200,000–$250,000, a deposit of 20–35% (higher for residential), a documented investment strategy, and a fund with at least two years of compliant audit history. Centric Accountants works with brokers who specialise in SMSF lending and can assist with the additional documentation lenders require, including bare trust deeds and trustee declarations.