What is a Limited Recourse Borrowing Arrangement (LRBA) in an SMSF?

If you're managing or have been researching SMSFs and want to invest in property, you've likely come across the term Limited Recourse Borrowing Arrangement (LRBA). It's a fancy way of saying your SMSF can borrow money to purchase an asset, usually property, while providing an extra layer of protection for your other fund assets.

But how does this actually work, and what’s the deal with bare trusts?

Let’s break it down!

How Does an LRBA Work?

An LRBA allows your SMSF to borrow funds to acquire a single asset (like real estate). The "limited recourse" part is key—if your SMSF defaults on the loan, the lender can only seize the asset bought with the loan, not any other assets in your SMSF. This structure helps to safeguard the rest of your retirement savings from being at risk.

So, essentially, you get to leverage your SMSF to invest in a high-value asset (like property), but only the asset purchased with the borrowed funds is on the line in case things go south. Sounds like a smart move, right?

Enter the Bare Trust (or Custody Trust)

Now, let’s talk about where a bare trust comes into play. When an SMSF uses an LRBA to buy an asset, it can’t hold the asset directly (because of super laws). Instead, the asset is held in a bare trust (also called a custody trust) until the loan is fully paid off.

Here’s how it works:

• The bare trust holds the legal title to the asset on behalf of your SMSF, which is still the beneficial owner.

• Your SMSF receives all the benefits from the asset—like rental income or capital growth—but the bare trust is the legal owner during the loan period.

• Once your SMSF repays the loan, the ownership of the asset is transferred from the bare trust to the SMSF.

This structure ensures that the only asset at risk (in case of default) is the one held by the bare trust, keeping your other SMSF assets safe.

Why It’s Important to Get the Right Advice

While LRBAs offer an exciting way to leverage your SMSF, they can be complex to set up correctly. You'll need to ensure your SMSF stays compliant with the super laws, and the bare trust must be structured properly. That's why getting expert advice is crucial to avoid potential pitfalls.

An LRBA can be a powerful tool in your SMSF strategy, but it's essential to have a strong team backing you up—because, as always, it’s not just about making the right investment but doing it the right way!

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Thinking about setting up an LRBA for your SMSF? Make sure you have the right advice and structure in place—because compliance is everything when it comes to your SMSF!