If you have the expertise and time to competently manage your own super fund, you’ve probably considered SMSF borrowing or a limited recourse loan. Leverage can be an important part of investing, and borrowing to buy assets is a way to leverage i.e. magnify your investment potential.

Property is probably the most common asset SMSF borrowing would be used for, but some funds might also take out loans to purchase securities like shares or bonds. However, there are lots of extra restrictions on SMSF lending you’ll want to get your head around beforehand.

As with any investment, SMSF borrowing carries inherent risks. Changes in property prices, interest rates, or economic conditions can impact the SMSF’s position. Trustees should have a solid risk management strategy in place, and they are generally required by the ATO to update their investment strategy document annually to reflect changes in investments and market conditions.

When SMSF borrowing is allowed

There are a few circumstances where SMSF borrowing is allowed. Short term lending is allowed only for a few specific purposes, including meeting benefit payment obligations and to cover settlement fees for security transactions. There are maximum loan term lengths and size requirements for these loans.

SMSF trustees can use limited recourse borrowing for larger scale loans to purchase assets, but there are also several rules governing this type of lending, which we’ll get to.

What the fund is borrowing for


Maximum loan size (relative to total fund assets)

Maximum loan term

To meet benefit payment obligations to members



90 days

To pay an outstanding surcharge liability



90 days

To cover settlement fees of security transactions

You can only borrow if you didn’t think you would need to when you bought the securities


7 days

To buy an asset to add to the fund portfolio

Must be through a limited recourse loan



What is a limited recourse loan?

Limited recourse borrowing arrangements (LRBA) are the other way SMSFs can get a loan. This usually involves establishing a separate holding trust that owns the asset on behalf of the SMSF.

SMSF loans can either be offered by an institution such as a bank or non-bank lender, or from members in the SMSF who act as the bank towards the fund. In the case of the latter, the ATO sets out interest rates applicable, called the Safe Harbour provisions; they tend to be markedly higher than what’s offered on the open market.

There are two defining features of limited recourse loans. Firstly, the SMSF trustee can only use the loan to buy a single asset, or a collection of identical assets at the same market value. A single property, for example, or a bunch of shares in the same company. The loan couldn’t be used for more than one property or shares in more than one company.

Secondly, the ‘limited recourse’ aspect of the loan refers to the fact that in the event of default, the lender is only entitled to the asset purchased with the borrowed funds. The lender cannot claim any of the other assets in the fund, so everything else is protected. This means that SMSF loans likely carry higher interest rates because there is higher risk for the lender.

What can you buy with a limited recourse loan?

There are several assets SMSF trustees could buy using a limited recourse loan. Property is most common; either commercial or residential. However, it could also go towards securities like shares or bonds, provided they are all identical.

Limited recourse borrowing arrangement structure

The SMSF trustee picks out a specific asset (or collection of the same, identical asset) for the fund to require. The trustee will arrange the limited recourse loan, but it is technically actually purchased by a separate entity, the holding trust, which owns the asset on behalf of the SMSF.

The trustee of the holding trust and the trustee of the SMSF fund cannot be the same entity, so the SMSF trustee might set up a separate company to be in charge of the holding company. The SMSF repays the lender, while all income and capital gains from the asset also go to the SMSF.

More complicated loan arrangements

LRBAs involve additional complexity compared to normal consumer loans because of the legal and compliance requirements. When borrowing through a lender, the application and approval times are likely longer than regular home loans because of this reason. Trustees should ensure they fully understand the implications and seek professional advice before proceeding.

What are the rules on limited recourse borrowing arrangements?

While limited recourse loans can offer attractive benefits, there are important limitations to keep in mind.

The arm's length rule

SMSF transactions must be on an arm's length basis. This means the purchase and sale price of assets in the fund need to always reflect its true market value, and any income from assets held by the fund should always reflect the market rate of return. Any income that comes from non arm's length income activities is taxed at the highest marginal rate.

In general, this means the fund can’t use the limited recourse loan to buy or sell assets from a related party (a fund member, a family member of a fund member, or a business associate of a fund member). There are a few exceptions though. The following assets can be purchased from a related party, provided it is acquired at market value.

  • Shares, units or bonds listed on an approved stock exchange

  • Land and buildings used wholly and exclusively in a business, in an area no more than two hectares

  • An in-house asset, which are any of the following

    • A loan or investment to a related party of the fund

    • An asset of the fund leased to a related party

    • An investment in a related trust

  • An asset specifically excluded from being an in-house asset

In practical terms, this means you can’t, for example, buy a cut-price property from your uncle, then rent it out to your friend for below-market rates. However, this differs slightly for commercial properties where they can be rented out to related parties, including your own business.

Sole purpose test

SMSFs must always adhere to the sole purpose test, which means that their investments must be solely for the purpose of providing retirement benefits to its members. Any investment decision that benefits members in the present, rather than for retirement, may breach the test and incur penalties. This means the limited recourse loan needs to be for the purchase of an asset that is exclusively for the benefit of members once they have retired.

Related party loans

Limited recourse borrowing where the lender is a related party is allowed. However, as per the ATO website, the tax office are likely to “apply scrutiny” to these loans to ascertain whether the loan terms meet the arms length requirements and the loan terms are in line with market standards.

Genuine borrowing to acquire an asset

The ATO says it is essential there is appropriate documentation demonstrating the LRBA was genuinely to acquire an asset, particularly if the loan was written by a related party. Without documentation that proves the money was borrowed for this purpose, the ATO could consider the money a contribution to the fund, which could mean tax consequences.

LBRA can only be used for maintenance, not improvements

A limited recourse loan can be allocated to the repair or maintenance of an asset, but not improvements. The ATO test to determine whether an asset has been improved or maintained, it considers whether the state or function of the acquirable asset as a whole has been significantly altered for the better.

For example, a limited recourse loan could not be put towards a substantial renovation of a property, because this would be an improvement. However, it could be drawn down for say a burst water pipe or other maintenance.