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Rules for entering an LRBA

The rules your self-managed super fund (SMSF) must follow depends on when you entered the LRBA.

Published 2 April 2025

Arrangements entered from 7 July 2010

Before entering a limited recourse borrowing arrangement (LRBA), you need to ensure your potential arrangement meets the current super laws.

If the conditions are not met, your SMSF is prohibited from borrowing money.

Use of borrowed money

The borrowed money must be used to acquire either a:

  • single asset
  • collection of identical assets that have the same market value and can be treated as a single asset.

The borrowed money can also be used to pay for expenses from:

  • the borrowing or asset acquisition, such as loan establishment costs or stamp duty
  • maintaining or repairing the asset.

The borrowed money cannot be used to improve an asset.

The asset cannot be subject to a charge other than as provided in relation to the borrowing by the SMSF. A charge means any other mortgage, loan or encumbrance.

Legal ownership

The asset is held in the holding trust so that the SMSF trustee receives a beneficial interest in the asset.

The SMSF trustee has the right to acquire legal ownership of the asset by making one or more payments.

Recourse under LRBA

Any recourse that anyone has under the LRBA against the SMSF trustee is limited to rights relating to the asset. This applies to rights relating to:

  • a default on the borrowing and related charges
  • the SMSF's rights to the asset, such as income from the asset.

Asset replacement

The asset can be replaced by another asset in limited circumstances. These include:

  • a share in a company or unit in a unit trust where the replacement asset
    • is a share or unit in the same company or unit trust and has the same market value at the time of replacement
    • is a share or unit in another company or unit trust if the replacement occurs because of a takeover, merger, demerger or restructure of the original entity
  • an instalment receipt that converts to a share or collection of shares in a company
  • a share in a company where the replacement asset is a stapled security if it occurs under a scheme of arrangement of a company such as a restructure
  • a unit in a unit trust can be replaced by a unit in the same trust if the replacement is due to an exercise of discretion granted to the trustee of that unit trust under the trust deed.

For more information, see Self Managed Superannuation Funds Ruling SMSFR 2012/1 Self Managed Superannuation Funds: limited recourse borrowing arrangements - application of key concepts.

Arrangements entered between 24 September 2007 and 6 July 2010

Different rules apply to arrangements entered on or after 24 September 2007 and before 7 July 2010. Arrangements entered during this time must continue to meet the rules that applied when the arrangement was entered.

If the conditions are not met, your SMSF is prohibited from borrowing money.

Use of borrowed money

The borrowed money was used to acquire an asset (or a replacement asset) that the fund is not otherwise prohibited from acquiring.

Legal ownership

The asset is held in the holding trust so that the SMSF trustee receives a beneficial interest in the asset.

The SMSF trustee has the right to acquire legal ownership of the asset by making one or more payments after receiving the beneficial interest.

Recourse under LRBA

Any recourse that anyone has under the LRBA against the SMSF trustee is limited to rights relating to the asset. This applies to rights relating to:

  • a default on the borrowing and related charges
  • the SMSF's rights to the asset, such as income from the asset.

Asset replacement

Under the rules that apply at this time, the replacement asset is not limited to any particular type of asset. It must be an asset the SMSF trustee is not prohibited from acquiring.

If the arrangement that applied during this period ceases, any new borrowing or replacement asset will fall under the rules that apply from 7 July 2010. Any refinancing will also have to meet the law that applies from 7 July 2010.

Arrangements entered before 24 September 2007

SMSFs were unable to enter LRBAs involving borrowing money to acquire an asset.

Changes resulting in a new arrangement

If any of the parties make a significant change to the terms or conditions of an LRBA, the arrangement comes to an end and a new one starts.

If the original arrangement was entered between 24 September 2007 and 6 July 2010, the current rules will apply to the new arrangement.

Changes resulting in a new arrangement include:

  • The borrowing under the original arrangement is refinanced.
  • There is a borrowing that is inconsistent with the earlier arrangement – for example, borrowing to acquire an asset or class of asset clearly not contemplated under the original arrangement.
  • There has been a change to the ultimate beneficiaries of the arrangement resulting from selling a structure involving a pre-existing arrangement.

Example: new arrangement due to change in SMSF members

An LRBA was entered before 7 July 2010.

On 17 April 2014, all trustees of the SMSF and directors of the lender were replaced by new trustees and directors.

As there has been a change to all the ultimate beneficiaries, the LRBA is treated as a new arrangement and must meet the current rules.

End of example

Conditions for refinancing an LRBA

You can refinance an LRBA if it meets the requirements of the law that applied when the refinancing took place.

If you entered an arrangement between 24 September 2007 and 6 July 2010 and refinanced the LRBA from 7 July 2010, the new arrangement must meet the current rules.

Where a new trust is created to hold the asset, SMSF trustees must ensure that the:

  • asset is transferred directly to that new trust
  • SMSF does not temporarily obtain title to the asset at that time.

Varying the terms of an LRBA

Varying the contract of borrowing does not always result in the end of the previous borrowing and the creation of a new and different borrowing (a refinancing). This depends on the:

  • nature and extent of the variation
  • intention of the parties.

Relevant factors to consider include where:

  • the original agreement allowed the parties to vary the terms
  • an update to a particular condition ended up changing additional conditions.

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