Leverage your SMSF investments
1 January 2012 | Minutes to read: 3

Leverage your SMSF investments

By William Buck

As superannuation legislation becomes increasingly restrictive, more people are looking for alternative strategies to accumulate wealth in their superannuation fund.  Though complex in structure, a Limited Recourse Borrowing Arrangement (LRBA) can provide an effective tool for investing in superannuation.

Legislation regarding borrowing by a self-managed superannuation fund (SMSF) has traditionally been very strict.  The introduction of LRBAs in 2007, however, has made it possible for SMSFs to borrow funds to purchase an investment asset in some circumstances.

Purchasing assets through a SMSF is often used as part of a tax effective wealth accumulation strategy for the following reasons:

  • SMSFs are generally subject to an income tax rate of just 15%
  • Tax on SMSF capital gains may be levied at just 10%
  • Where the SMSF pays pensions to its members, its tax rate may be reduced to nil.

An LRBA enables a SMSF to purchase assets which it would otherwise be unable to acquire; particularly where a SMSF has insufficient funds available.

For example, a SMSF with $250,000 of available cash may be able to purchase an asset worth $500,000 by borrowing the additional 50% from a financial institution or related party to the SMSF (some lenders may even be prepared to loan up to 90% of the asset value.)  This may dramatically increase the SMSF’s ability to leverage off its existing asset base to acquire substantial investments.

What assets can be acquired under an LBRA?

An SMSF may only enter into an LRBA to purchase certain assets as outlined in section 67A of the Superannuation Industry (Supervision Act) (“the SIS Act”).  Borrowings made by a SMSF are authorised provided that:

  • The borrowing is applied for the acquisition of a single acquirable asset
  • The acquirable asset is held on bare trust
  • The SMSF has a beneficial interest in the acquirable asset and a right to legal ownership (i.e. the SMSF is entitled to all income, expenses and capital growth related to the asset)
  • The recourse of the lender is limited to the asset which is the subject of the arrangement. This ensures that the other assets of the SMSF are not exposed in the event of default.

Examples of assets that may be purchased under a LRBA include: listed securities, commercial property, and residential property.  Note that a SMSF may not borrow to acquire multiple assets in one bare trust.  However, a ‘single acquirable asset’ may include a collection of assets which are identical and have the same market value.

For example, a SMSF may use one LRBA to acquire 100 securities in Company A.  It may not use one LRBA to acquire 50 securities in Company A and 50 securities in Company B (but it could use a separate LRBA to acquire each parcel).

Funding as vehicle for wealth accumulation

Under the SIS Act, there are no restrictions on who can lend money to a SMSF under an LRBA.  In most circumstances the SMSF will borrow money from a bank or financial institution.  However, related parties, including SMSF members may also lend money to the SMSF under a LRBA.

Where large amounts of cash are held by members outside the SMSF, self-funding can provide an opportunity to deploy excess funds into the more favourable superannuation environment.  In these circumstances the arm’s length rules must be strictly adhered to.

LRBAs in practice

A business owner may use an LRBA to purchase business property, such as their business premises, which can then be rented back to the business owner at commercial rates under a properly documented lease agreement.

Where the business owner already owns his or her business premises, the SMSF may be used to acquire the asset from the  owner – freeing up any of the owner’s accumulated equity.  The small business CGT concessions may be used to minimise any capital gains tax on the transaction.

An LRBA can be used to acquire other types of investments – such as residential rental properties. However, while business premises can be rented to SMSF members or their associates, residential properties cannot.


While the benefits of an LRBA are clear, it is important to consider some of the intricacies around these arrangements:

  • The cost of setting up an LRBA can be significant – typically between $3,000 and $10,000, but potentially even more in complex situations
  • The SMSF will be required to comply with complex rules governing LRBAs both at the commencement of the LRBA and for the duration of the borrowing
  • The SMSF will need to ensure that it is able to fund the borrowing – through member contributions and SMSF earnings
  • The tax benefit on the interest expense is only 15% versus up to 46.5% if a negatively geared asset was acquired outside of superannuation by an individual and so a LRBA only “stacks up” if certain parameters (including in respect of capital growth rates) are met.

Detailed advice should be sought before entering into an LRBA arrangement.  If you are interested in investigating how an LRBA or other superannuation strategy could help you accumulate more wealth please contact your local William Buck office.

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