SMSF Limited Recourse Borrowing Arrangements (LRBA) Explained for Healthcare Workers product guide

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SMSF Limited Recourse Borrowing Arrangements (LRBA) Explained for Healthcare Workers

For many Australian healthcare workers, the appeal of using superannuation to invest in property is straightforward: leverage the tax-advantaged environment of an SMSF to build wealth through an asset class they understand. But there is a fundamental legal problem — traditionally, SMSF trustees aren't allowed to borrow under the Superannuation Industry (Supervision) Act 1993 (SIS Act). The Limited Recourse Borrowing Arrangement (LRBA) is the single, tightly regulated exception to that prohibition.

Understanding how an LRBA works — in precise legal and structural terms — is not optional for any healthcare worker considering geared SMSF property. The rules are complex, the penalties for getting them wrong are severe, and the compliance obligations continue for the entire life of the loan. This article provides healthcare workers with the foundational knowledge to evaluate whether an LRBA is appropriate for their financial position, and to engage their adviser team with informed, targeted questions.

What Is an LRBA? The Legal Definition

A Limited Recourse Borrowing Arrangement (LRBA) is an SMSF provision that allows SMSF trustees to borrow money from a third-party lender to buy an asset.

Investment warrants — the precursor to LRBAs — were introduced in 2007, and were changed to LRBAs in 2010 as part of the Simpler Super legislation.

The "limited recourse" element is the critical protection that makes this structure legally permissible within superannuation law. Generally, when an entity borrows money to purchase an asset, the lender may have recourse to other assets of the borrower to ensure the loan can be repaid in the event of default. The LRBA structure allows the SMSF to continue to meet the SMSF borrowing rules as recourse by the lender for repayment default is limited to the asset purchased by the bare trust. The remaining assets owned by the fund are protected against any claims by the lender.

For a nurse, GP, or allied health professional with a meaningful SMSF balance accumulated over years of contributions — including award-based super and salary packaging — this protection is significant. A loan default on a single property cannot unwind the rest of the fund's investments.

The Three-Party Structure: SMSF, Bare Trust, and Lender

The LRBA is not a simple two-party loan. It involves three distinct legal entities, each with a defined role.

1. The SMSF (Beneficial Owner)

The SMSF acquires the beneficial interest in the asset and, after repaying the loan, has the right to legal ownership of the asset. While the asset is not held directly by the SMSF, any investment returns earned from the asset go to the SMSF. This means all rental income, capital growth, and tax benefits flow to the fund — even during the period the loan is outstanding.

2. The Bare Trust (Legal Owner During the Loan Term)

The property is legally owned by the trustee of the bare trust (the custodian trustee), which holds the asset on behalf of the SMSF. The SMSF has the 'beneficial ownership' and is entitled to all rental income and capital growth. This structure is necessary to comply with superannuation law, which requires the asset to be held separately until the loan is paid off.

A bare trust is generally understood to exhibit the following characteristics: the trustee holds property without any interest therein, other than that existing by reason of the office and the legal title as trustee; and the trustee has no discretion and no active duties, other than to convey the trust property on demand to the beneficiary or beneficiaries or as directed by them.

A critical structural point: the SIS Act does not explicitly state who can or can't be trustee of a holding/bare trust for the purposes of an LRBA. However, the holding/bare trust's trustee cannot be the same individual or corporate trustee of the SMSF. In practice, a separate custodian trustee — usually a newly incorporated Pty Limited company — should always be used.

3. The Lender

The lender is the party that provides the limited recourse financing. It can either be a related party lender or a commercial lender. If the lender is a related party, the loan terms must be commercial.

Practical note for healthcare workers: The major banks have exited the SMSF borrowing scene, but the gap has been quickly replaced by second-tier lenders. This means healthcare workers must engage specialist SMSF lenders — a point covered in our companion guide Choosing the Right SMSF Adviser, Accountant, and Lender as a Healthcare Worker.

The Single Acquirable Asset Rule: What It Means in Practice

One of the most consequential — and frequently misunderstood — rules governing LRBAs is the single acquirable asset requirement. Under Section 67A of the SIS Act, an LRBA can only be used to acquire a single property or a group of identical assets with the same market value (such as a parcel of shares in the same company).

SMSFR 2012/1 provides clarity on the ATO's view of what is a single acquirable asset. A single acquirable asset can be any type including property, shares, units and collectibles. It may also include a collection of identical assets with the same market value under one LRBA such as units in a single unit trust or shares of a single class in a single company.

For healthcare workers considering property, the practical implications of this rule include:

You cannot buy a block of land and build on it under the same LRBA. A critical LRBA rule is that the borrowed funds must be used to acquire a 'single acquirable asset'. This means you cannot use one LRBA to buy a block of land and then borrow more under the same arrangement to build a house on it.
An apartment and a car park on separate titles may qualify as a single asset — but only if state law does not allow the two titles to be disposed of separately. An SMSF trustee who wants to purchase an apartment with a separate car park where state law does not allow the two titles to be disposed of separately would find that the apartment and car park are considered a single acquirable asset.
Multiple separate properties require separate LRBAs. Where there is more than one acquirable asset, there is scope for the SMSF to acquire these under separate LRBA arrangements.
Multiple SMSFs cannot jointly borrow to purchase a single asset. It is not permissible for multiple SMSFs to jointly borrow to buy a single acquirable asset.

The Prohibition on Using Borrowed Funds for Improvements

This is the rule that catches the most healthcare workers off guard — particularly those who plan to add value to a property through renovation.

The borrowed money cannot be used to improve an asset. This prohibition is absolute under the SIS Act. No amount borrowed under an LRBA can be applied to improve the single acquirable asset. Where an SMSF borrows money to improve a single acquirable asset, the exception under section 67A will not apply and there will be a breach of s67 of the SIS Act. In essence, any improvements must be completed with other existing fund assets or contributions made to the fund.

Repairs vs. Improvements: A Critical Distinction

The ATO's ruling SMSFR 2012/1 draws a precise line between what is permitted and what is not:

Activity	Funded by Borrowed Money?	Funded by Fund Cash?
Replacing a broken pipe	✅ Yes (repair)	✅ Yes
Repainting to restore original condition	✅ Yes (maintenance)	✅ Yes
Adding a new bathroom	❌ No (improvement)	✅ Yes
Extending a clinic waiting room	❌ No (improvement)	✅ Yes
Subdividing a property into two titles	❌ No (new asset)	❌ No (while LRBA active)

'Repair' includes restoring the asset to its former state, correcting any physical defects, damage or deterioration caused by wear and tear or deliberate damage so that its functional efficiency is restored. Repair may include replacing part of an asset but not replacing the whole asset.

'Maintenance' refers to work done to prevent or anticipate defects, damage or deterioration to keep the asset in good working order. Work done to significantly improve an asset's functional efficiency and value is an 'improvement'.

For a healthcare worker who purchases a clinic premises through their SMSF under an LRBA — a strategy explored in depth in our guide Buying a Medical or Allied Health Clinic Through Your SMSF — this distinction is operationally critical. Expanding the consulting suite while the loan is outstanding would breach the SIS Act if funded from borrowed money.

ATO Safe Harbour Terms: The Key Numbers for 2024–25

When a healthcare worker's SMSF borrows from a related party (for example, the member lends their own personal savings to the fund), the ATO requires the loan to be on arm's-length commercial terms. The safe harbour terms are set out in ATO Practical Compliance Guideline PCG 2016/5 — Income tax arm's-length terms for limited recourse borrowing arrangements.

When an SMSF borrows to acquire an asset under an LRBA, section 295-550 ITAA 1997 requires loan terms to be consistent with an arm's length dealing. The ATO's Practical Compliance Guideline PCG 2016/5 sets out the 'safe harbour' terms for related party LRBAs. As long as your SMSF structures LRBAs in line with these terms, the ATO will accept that the arrangement is on arm's length terms, ensuring that the NALI provisions do not apply purely because of the borrowing arrangement.

The key safe harbour parameters for 2024–25 are:

Parameter	Real Property	Listed Shares/Units
Interest Rate	9.35%	11.35%
Maximum LVR	70%	50%
Maximum Loan Term	15 years	15 years
Repayment Type	Principal & Interest	Principal & Interest
Repayment Frequency	Monthly	Monthly

Note on 2025–26: For the 2025–26 financial year, the safe harbour interest rates are 8.95% for LRBAs used to acquire real property (down from 9.35% in 2024–25) and 10.95% for LRBAs used to acquire listed securities (down from 11.35% in 2024–25).

How the Safe Harbour Rate Is Calculated

The basis for the interest rate is referenced from Reserve Bank of Australia Indicator Lending Rates for banks providing standard variable housing loans for investors. The applicable interest rate for a financial year is the rate published for May (the rate for the month of May immediately prior to the start of the relevant financial year).

What Happens If You Exceed the Safe Harbour LVR?

Under the ATO guidelines the maximum LVR acceptable for property is 70% for related-party LRBAs. This does not mean the superannuation fund automatically fails the NALI provisions. What it does mean is that documentary evidence is required to demonstrate that a related party loan is at arm's length.

The consequences of non-compliance are severe. When an SMSF enters a limited recourse borrowing arrangement that is NOT at arm's length, any income received under that arrangement becomes non-arm's length income (NALI). Non-arm's length income of an SMSF is taxed at the highest marginal tax rate of 45% plus 2% Medicare Levy (47%). For a specialist or GP earning at the top marginal tax rate who has established an SMSF specifically for its 15% tax advantage, triggering NALI would eliminate the entire rationale for the strategy.

Commercial Lender LVRs vs. ATO Safe Harbour LVRs

It is important to distinguish between the ATO's safe harbour LVR (which applies specifically to related-party loans) and the LVRs offered by commercial lenders (which apply to arm's-length bank or non-bank lending).

Unlike a standard home loan, lenders are more conservative with SMSF lending. Typically, the maximum Loan to Value Ratio (LVR) you can expect is between 70% and 80%. This means your SMSF will need to have a deposit of at least 20–30% of the purchase price, plus enough cash to cover costs like stamp duty, legal fees, and advisory fees.

Lending institutions will assess an SMSF loan application taking into account gearing based on the market value of the underlying asset, the size of the fund's deposit, the rental yield and the ability of the SMSF to repay the loan. The lender's risk is considered to be higher in relation to lending to an SMSF vs lending to an individual or a business, as the SIS laws and regulations restrict the ability of cash being pumped into a SMSF if liquidity becomes an issue.

A critical serviceability point for healthcare workers: lenders assess SMSF income and contributions only — personal salary cannot be used to service an SMSF loan. This means a nurse on $90,000 per year cannot use their salary to demonstrate loan serviceability; the fund must demonstrate it can meet repayments from rental income and super contributions alone.

The Maximum 15-Year Loan Term

For an original variable interest rate LRBA loan, the maximum loan term is 15 years for both residential and commercial properties. For a refinancing variable interest rate LRBA loan, the maximum loan term is 15 years less the duration of any previous loan tied to the asset.

If the trustees opted for a fixed LRBA rate, it may be fixed for a maximum of 5 years and will convert to a variable interest LRBA loan rate at the end of this period. The combined loan term cannot exceed 15 years.

For healthcare workers in mid-career — say a 42-year-old GP with 23 years until the standard preservation age — a 15-year LRBA loan term is manageable within a longer-term retirement strategy. For an allied health professional closer to retirement, the interaction between the loan term and minimum pension drawdown obligations requires careful liquidity planning (see our guide SMSF Property Risks Healthcare Workers Must Manage).

What Happens to Title When the Loan Is Repaid?

This is the end-state that many healthcare workers overlook when modelling their LRBA strategy. The bare trustee uses the borrowed funds and additional monies provided by the SMSF to purchase and hold legal title to the single acquirable asset. Once the loan has been repaid, the SMSF can call for the transfer of the legal title to the asset.

While the holding trust is a related trust, the SMSF can acquire legal ownership of the asset from the holding trust once the LRBA has been repaid without breaching super laws.

However, the transfer is not automatic — and stamp duty implications vary by state. Each state and territory has its own complex stamp duty rules; some offer concessions (subject to strict conditions) on certain transfers to superannuation funds where there is no change in the beneficial ownership of the property.

Healthcare workers in Queensland benefit from legislative certainty: the Duties Act 2001 (Qld) has been amended to provide a stamp duty exemption for the transfer of property from a custodian (that is, a bare holding trust) to a self-managed superannuation fund (SMSF) when the loan under a limited recourse borrowing arrangement (LRBA) is eventually repaid. Similar concessions exist in other states, but the conditions differ, and professional advice is essential before the loan is fully repaid.

A practical compliance note: The Tax Office considers that the in-house asset exemption under sections 71(8) and (9) of the SIS Act no longer applies once the loan under a LRBA is eventually repaid. Accordingly, the acquirable asset will need to be transferred from the holding trust back to the SMSF once the loan is repaid.

A Healthcare Worker LRBA Scenario: Illustrative Example

Consider a scenario to make these rules concrete:

Dr. Priya Sharma, a 45-year-old GP in South Australia, has an SMSF with a corporate trustee and a fund balance of $620,000. She wants to purchase her clinic premises for $900,000 using an LRBA.

Deposit required (30% at 70% LVR): $270,000 from SMSF cash
Loan amount: $630,000 from a specialist non-bank SMSF lender
Bare trust: A newly incorporated Pty Ltd company (separate from the SMSF trustee company) is established as the custodian trustee
Loan term: 15 years, principal and interest, monthly repayments
Post-settlement liquidity: The SMSF retains $350,000 in cash and other assets — critical for meeting loan repayments during any vacancy period and for fund expenses
Rental income: The clinic is leased back to Dr. Sharma's operating medical practice at an independently assessed market rate, satisfying the ATO's arm's-length and business real property requirements

Once the loan is repaid in 15 years, Dr. Sharma's SMSF can call for the transfer of legal title from the bare trust custodian. At that point, depending on whether she has commenced pension phase, any future capital gain on the property may be subject to zero CGT — a powerful outcome for a property that has appreciated over 15 years of professional ownership (see SMSF Property Tax Benefits for Australian Healthcare Workers: What You Actually Save).

Key Takeaways

An LRBA is the only legal mechanism by which an SMSF can borrow money to purchase property. It is authorised under section 67A of the SIS Act and is subject to strict ongoing compliance obligations — not just at setup.
Three parties are required: the SMSF (beneficial owner), the bare/holding trust (legal owner during the loan term), and the lender. The bare trust custodian trustee must be a separate entity from the SMSF trustee.
Borrowed money cannot fund improvements — only repairs and maintenance. Healthcare workers planning to renovate or extend a property must use existing fund cash, not LRBA funds.
The 2024–25 ATO safe harbour interest rate is 9.35% for real property under a related-party LRBA, reducing to 8.95% for 2025–26. The maximum LVR under the safe harbour is 70%, and the maximum loan term is 15 years.
NALI is the primary compliance risk: any LRBA not conducted on arm's-length terms exposes the fund's income to taxation at 47% — eliminating the core tax advantage of the SMSF structure.

Conclusion

The LRBA is a powerful but unforgiving mechanism. For healthcare workers — whether a mid-career nurse building superannuation through salary packaging, or a specialist surgeon considering a clinic purchase — the structure offers genuine leverage into property within a tax-advantaged environment. But the three-party structure, single acquirable asset rule, improvement prohibition, and ongoing arm's-length requirements create a compliance framework that demands specialist professional support at every stage.

Understanding the LRBA in detail is the prerequisite for every other decision in an SMSF property strategy: whether the fund balance is sufficient (see How Much Super Do Healthcare Workers Need to Make SMSF Property Investment Worthwhile?), whether residential or commercial property is the right asset class (see Residential vs Commercial Property in an SMSF: Which Is Better for Healthcare Workers?), and how the strategy interacts with the proposed Division 296 tax for high-earning specialists (see SMSF Property and the Division 296 Tax: What High-Earning Healthcare Workers Need to Know). The LRBA is not the starting point — it is the engine that makes leveraged SMSF property possible, and it must be understood before it is engaged.

References

Australian Taxation Office. "Limited Recourse Borrowing Arrangements." ATO.gov.au, 2024. https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/self-managed-super-funds-smsf/smsf-investing/restrictions-on-smsf-investments/smsf-borrowing-restrictions/limited-recourse-borrowing-arrangements
Australian Taxation Office. "Practical Compliance Guideline PCG 2016/5 — Income Tax: Arm's Length Terms for Limited Recourse Borrowing Arrangements Established by Self-Managed Superannuation Funds." ATO.gov.au, 2016 (updated annually). https://www.ato.gov.au/law/view/document?docid=COG/PCG20165/NAT/ATO/00001
Australian Taxation Office. "SMSF Ruling SMSFR 2012/1 — Self Managed Superannuation Funds: Limited Recourse Borrowing Arrangements — Application of Key Concepts." ATO.gov.au, 2012. https://www.ato.gov.au/law/view/document?docid=COG/SMSFR20121/NAT/ATO/00001
SMSF Association. "LRBA Go-To Guide." SMSFAssociation.com, 2022. https://www.smsfassociation.com/wp-content/uploads/2022/07/LRBA-Go-To-Guide.pdf
Accurium. "LRBA Safe Harbour Interest Rate Update: What SMSF Trustees and Advisers Need to Do for 2025–26." Accurium.com.au, June 2025. https://www.accurium.com.au/blog/2025/06/lrba-safe-harbour-interest-rate-update-what-smsf-trustees-and-advisers-need-to-do-for-2025-26/
MLC TechConnect. "Guide to Limited Recourse Borrowing Arrangements." MLC.com.au, 2025. https://www.mlc.com.au/content/dam/mlcsecure/adviser/technical/pdf/guide_to_lrbas.pdf
Grant Thornton Australia. "SMSF Limited Recourse Borrowing Arrangements: What Are They and How Do They Work?" GrantThornton.com.au, July 2024. https://www.grantthornton.com.au/insights/blogs/smsf-limited-recourse-borrowing-arrangements-what-are-they-and-how-do-they-work/
Sladen Legal. "SMSFs and Bare Trusts — Not Just for LRBAs." Sladen.com.au, November 2025. https://sladen.com.au/news/2025/11/20/smsfs-and-bare-trusts-not-just-for-lrbas
BT Professional. "SMSF Limited Recourse Borrowing Arrangement Rules." BT.com.au, 2025. https://www.bt.com.au/professional/knowledge-centre/client-strategies/smsf-strategies/limited-recourse-borrowing.html