In Australia, an SMSF generally cannot borrow money directly to purchase property or other assets under standard superannuation rules, as this violates the sole purpose test (i.e., funds must be used solely for retirement benefits, not leveraged speculation).
However, there’s a key exception: Limited Recourse Borrowing Arrangements (LRBAs).
Under an LRBA, an SMSF can borrow to buy property, provided specific conditions are met:
- The loan must be “limited recourse,” meaning the lender’s claim is restricted to the asset purchased (e.g., the property), not the entire SMSF’s assets.
- The property must be held in a separate bare trust, isolating it from other SMSF assets.
- The investment must comply with the Superannuation Industry (Supervision) Act 1993 (SIS Act) and align with the fund’s investment strategy.
Typically, this is used for single acquirable assets like real estate (e.g., a residential or commercial property), not shares or other fluctuating assets.
As of now, SMSFs commonly use LRBAs to invest in property, especially given Australia’s strong real estate market. For example, data from the Australian Taxation Office (ATO) shows that in 2024, property made up around 17% of SMSF assets, with many trustees utilising LRBAs to diversify beyond cash and equities.
That said, there are restrictions:
- The SMSF cannot borrow from related parties (e.g., fund members) unless terms are arm’s length and commercial.
- Post-June 30, 2021, unpaid LRBA amounts count toward a member’s Total Superannuation Balance, potentially limiting contributions if it exceeds thresholds like $1.9 million (2025 cap).
- Lenders (banks or non-bank financiers) often require 20%+ deposits and charge higher interest rates due to the limited recourse nature.