Under the Superannuation Industry (Supervision) Act 1993 (Cth) (“SIS Act”), trustees of self-managed superannuation funds (SMSFs) are generally prohibited from borrowing money. However, an exception exists in the form of a Limited Recourse Borrowing Arrangement (LRBA), which permits borrowing for the acquisition of a “single acquirable asset” subject to strict legislative requirements. This briefing outlines the legal structure, compliance requirements, and practical implementation of an LRBA for the acquisition of real property, with a particular focus on the bare trust arrangement required by section 67A of the SIS Act.
Legal Requirements of a Limited Recourse Borrowing Arrangement
To establish a compliant LRBA, the following conditions must be satisfied:
- Single Acquirable Asset:
The borrowed funds must be applied toward the acquisition of a single asset (or a collection of identical assets treated as a single asset). In the context of real property, this means the contract must not include chattels or items not considered fixtures. - Complying Fund Status:
The SMSF must be a complying superannuation fund under the SIS Act and the acquisition must not contravene any investment restrictions under superannuation law, including the sole purpose test. - Holding Trust Structure:
The asset must be held on trust by a separate entity, commonly referred to as a bare trustee or custodian, on behalf of the SMSF trustee. The bare trustee holds legal title while the SMSF retains beneficial ownership. - Right to Acquire Legal Title:
The terms of the bare trust deed must provide the SMSF with the absolute right to acquire legal ownership of the asset upon discharge of the loan. - Limited Recourse:
The rights of the lender must be limited to the asset acquired under the LRBA. In other words, the lender may not have recourse to other assets held within the SMSF in the event of default.
Practical Implementation
Establishing the Bare Trust
A bare trust deed must be drafted prior to execution of the Contract for the Sale of Land. The bare trustee, generally a corporate entity, is named on the contract as purchaser and will hold legal title to the property during the term of the loan. It is imperative that the corporate trustee is established prior to exchange. Most lenders mandate that the bare trustee be a company rather than an individual.
Importantly, the bare trust deed must be signed and dated after the exchange of contracts. This is important to avoid the imposition of double stamp duty.
All costs associated with the acquisition, including the deposit, stamp duty, legal fees, and ongoing loan repayments, must be paid directly by the SMSF trustee. If an individual is contributing part of the costs, these costs must flow through the individual’s member balance in the SMSF. You must obtain proper advice from your SMSF team prior to doing so. The bare trustee is purely a legal holder and does not manage or fund the asset.
Legal and Compliance Risk
The arrangement must strictly comply with superannuation law to avoid adverse consequences, including non-compliance penalties or the disqualification of the SMSF. Particular attention should be paid to:
- ensuring the bare trust deed is properly drafted;
- ensuring records clearly demonstrate that the SMSF funded the acquisition and meets ongoing obligations;
- ensuring no cross-collateralisation or breach of the “single asset” rule.
Where the lender provides a draft bare trust deed, legal review is essential. At Cheney Suthers Lawyers, we strongly recommend using a deed prepared or reviewed by your SMSF specialist solicitor to ensure compliance.
Summary
An LRBA can be a powerful mechanism for enabling an SMSF to acquire property with borrowed funds, provided it is implemented correctly. Given the complexity of the arrangement and the strict compliance obligations under the SIS Act, legal advice should be sought at every stage of the transaction.
If your lender requires you to supply your own bare trust deed or independent legal advice on an existing one, our team at Cheney Suthers Lawyers is available to assist.
We also recommend obtaining independent financial advice before entering into an LRBA.