Purchasing real estate through a Self-Managed Superannuation Fund (SMSF) using a Limited Recourse Borrowing Arrangement (LRBA) is a powerful way to grow retirement savings through property investment. However, it also comes with strict rules regarding ownership, legal documentation, and what trustees can do before and after the loan is repaid — particularly when it comes to developing or improving the property.

What is a Limited Recourse Borrowing Arrangement (LRBA)?

An LRBA allows a SMSF to borrow money to acquire a single acquirable asset, such as property, where:

• The SMSF trustee holds beneficial ownership
• A custodian (bare trustee) holds legal title until the loan is repaid
• The loan is “limited recourse” — the lender can only access the acquired asset in case of default, not the SMSF’s other assets

This structure is regulated under sections 67A and 67B of the Superannuation Industry (Supervision) Act 1993 (SIS Act).

Control and ownership of property

Several documents underpin the LRBA structure and outline the right to acquire, hold, and deal with the property:

1. SMSF Trust Deed

• The fund’s governing document
• Must expressly authorise:
  • Borrowing under a LRBA
  • Property investment
  • Use of a custodian (bare trustee)
• Should align with the fund’s investment strategy

2. Bare Trust Deed (Holding Trust Deed)

• Establishes a separate legal trust over the asset
• The bare trustee holds legal title on behalf of the SMSF
• Limits the bare trustee’s role — they cannot deal with the property independently
• Must identify the specific asset (e.g., “Lot 12, Smith St, Brisbane”)

3. Loan Agreement

• Formalises the borrowing terms between the lender and the SMSF
• Must meet LRBA conditions and include:
  • Limited recourse clause
  • Commercial terms (interest, repayment, default provisions)
• Can be with a bank or a related-party lender (e.g., a member), but must be arm’s length

4. Mortgage Document

• Registers the lender’s interest against the property
• Must reflect the limited recourse nature of the arrangement
• Typically, in the name of the bare trustee3

5. Title Search

• Confirms legal title is held by the bare trustee
• Helps confirm asset identity for compliance and financing

6. Company Constitutions (if using corporate trustees)

• Constitutions for the SMSF trustee or bare trustee (if they are corporate entities)
• Must:
  • Allow the company to act as trustee
  • Permit entering into borrowings and trust arrangements
  • Be consistent with the trust deed and SIS Act

Rights to improve or develop the Property

The SIS Act distinguishes between repairs and improvements. What you can do with the property changes significantly depending on whether the loan is outstanding or repaid.

Before the Loan Is Repaid

You may:

• Undertake repairs and maintenance (e.g., repainting, fixing plumbing)
• Use SMSF funds (not borrowed funds) for small value-adding works — but only if they do not fundamentally change the character of the asset

You cannot:

• Subdivide or consolidate land
• Build or demolish structures
• Add dwellings or extensions
• Improve the property in a way that results in a new or different asset

ATO View: Improvements that change the asset’s character (e.g., turning vacant land into a developed site) are prohibited before loan repayment.

After the Loan Is Repaid

Once the LRBA is discharged:

• Legal title can be transferred from the bare trustee to the SMSF trustee (no CGT event if beneficial ownership has remained with the SMSF)
• The SMSF now holds full legal and beneficial ownership
• You may:
  • Improve, renovate, or develop the property
  • Subdivide land and sell parcels
  • Construct buildings or extend existing ones

All activities must still:

• Comply with the fund’s investment strategy
• Satisfy the sole purpose test (providing retirement benefits)

Before transferring legal title of any property from the bare trustee to the SMSF trustee, you should seek legal advice or speak to an accountant about any tax or duty implications.

Do different rules apply to business or commercial property?

The rules on improvements and development are the same regardless of property type — whether the asset is:

• Residential real estate
• Commercial premises
• Business real property.

However, leasing rules differ for Business real property (BRP), in that the property may be leased to a related party (e.g., a member’s company) but only if:

• it is leased on arm’s length terms
• the lease complies with sections 66 and 109 of the SIS Act

This makes BRP more attractive for members who run their own businesses, as it provides a compliant way to use SMSF property while contributing to retirement savings.

Note: Business use does not exempt the property from the LRBA improvement restrictions — you still can’t develop the property significantly until the loan is repaid.

Seek accounting and legal advice

Whilst purchasing property through an SMSF is an attractive and powerful way to bolster retirement funds, it can be complex and difficult to navigate with serious repercussions if you do not comply with the rules set out under the SIS Act and regulations.

Anyone looking to purchase property through an SMSF should obtain accounting and legal advice tailored to their specific circumstances to ensure compliance and to avoid any unexpected costs.  

If you have any questions in relation to purchasing property through an SMSF or want to understand how you can deal with SMSF property, please do not hesitate to contact our team.

How can FC Lawyers help?

At FC Lawyers, our experienced business and corporate team can assist with advising on, drafting and litigating matters concerning SMSF loans, trusts, purchases and other related matters. 

Contact our team today to discuss your legal needs.