LRBAs and bare trusts explained

If your SMSF is borrowing to buy property, two terms come up constantly: the LRBA and the bare trust. Here's what they mean, in general terms. This is factual information only — your accountant and solicitor handle the legal and tax side.

The Limited Recourse Borrowing Arrangement (LRBA)

An LRBA is the only way an SMSF can generally borrow to acquire a single asset such as a property. Its defining feature is that it is limited recourse: if the loan defaults, the lender's rights are generally limited to the asset bought with the loan — the fund's other assets are protected.

The bare (holding) trust

Under an LRBA, the property is held in a separate bare trust (also called a holding or custodian trust) with its own trustee, until the loan is repaid. The SMSF makes the repayments and is entitled to the income and, ultimately, legal ownership once the loan is paid out.

Getting the bare trust set up correctly — and at the right time relative to the contract — matters. This is legal work for your solicitor, coordinated with your accountant.

A few rules to be aware of

• The asset generally can't be improved using borrowed money (repairs and maintenance differ from improvements).
• Related-party transactions and the sole purpose test are tightly regulated.
• Structures can be difficult and costly to change after settlement.

Our role

We arrange the loan and coordinate timing with your bare-trust setup. We don't provide the legal, tax or SMSF-strategy advice. See how SMSF property loans work and our SMSF property loans page.