Important notice: this article is a structural explainer of how SMSF property lending works as a product category. It is general information only — not advice about whether establishing an SMSF, borrowing inside one, or acquiring property through super is appropriate for any person. Establishing an SMSF and entering a limited recourse borrowing arrangement are significant financial decisions. Licensed financial and legal advice is strongly recommended before proceeding. ASIC and the ATO both publish detailed guidance on SMSF requirements. Nothing in this article should be read as encouragement to set up an SMSF or use it to purchase property.
What a Limited Recourse Borrowing Arrangement Is
Section 67 of the Superannuation Industry (Supervision) Act 1993 (SIS Act) prohibits SMSF trustees from borrowing money. Section 67A creates a specific, narrow exception: a limited recourse borrowing arrangement, commonly called an LRBA.
Under section 67A, an SMSF trustee may borrow money provided the funds are applied to acquire a single acquirable asset that is held in a separate holding trust. The key phrase "limited recourse" refers to what happens if the borrower defaults: the lender's recourse is limited to the asset held in the holding trust. The other assets inside the SMSF — accumulating contributions, shares, cash — are quarantined and cannot be seized to recover the loan. That protection for the broader fund is the reason the structure exists in the form it does.
Throughout the loan term, the SMSF holds a beneficial interest in the asset. The trustee of the holding trust (the bare trustee) holds legal title. When the loan is fully repaid, legal title transfers to the SMSF trustee and the holding trust is wound up. That transfer at the end is the intended conclusion of the structure.
The Bare Trust and Why It Exists
The holding trust — often called the bare trust — is not a separate investment vehicle. It exists solely because the SIS Act requires it: legal title to the asset cannot sit with the SMSF itself during the period the asset is under a borrowing. The bare trust has no independent function beyond holding that title on behalf of the SMSF and handing it across once the debt is cleared.
In practice this means there are two separate trust deeds to establish: the SMSF deed and the bare trust deed. Both must be in place before settlement. A specialist solicitor is essential — the documentation requirements are specific and errors in the bare trust structure can cause the LRBA to fail the SIS Act conditions entirely.
The bare trustee is typically a company established for this purpose. It is a nominal holder only and has no discretion over the asset. It must act on the direction of the SMSF trustee and must transfer title as soon as the loan is repaid and the SMSF trustee requests it.
The Single Acquirable Asset Rule
Section 67A requires that the borrowed funds acquire a single acquirable asset. An LRBA cannot be used to acquire a mixed parcel of different assets within one borrowing. Each acquirable asset requires its own separate LRBA and its own holding trust.
For residential property, a single dwelling on a single title is a single acquirable asset. For commercial property, a single commercial premise on a single title meets the test. The ATO has published detailed guidance — including SMSFR 2012/1 — on what qualifies as a single acquirable asset, including how the test applies to assets that might change in character over time.
A collection of identical assets (for example, a collection of listed shares of the same class) can, in some circumstances, be treated as a single acquirable asset. However, the rules here are technically complex. The ATO's published rulings are the primary reference point and specialist advice is required.
The Repair vs Improvement Rule
Borrowed funds under an LRBA can be applied to repairs and maintenance of the asset — but not to improvements. This rule flows directly from section 67A and is explained in detail in ATO ruling SMSFR 2012/1.
The ATO's position is that an improvement changes the character or function of the asset relative to what it was at the time of acquisition under the LRBA. Repairs restore the asset to the condition it was in — or should be in — at that point. A leaking roof fixed back to its original state is a repair. Reconfiguring an internal layout to create an additional bedroom is an improvement.
The ATO specifically notes that the more run-down an asset is at the time of acquisition, the more likely that substantial works will constitute improvements rather than repairs. If a property in poor condition is acquired under an LRBA and then substantially renovated to make it tenantable, that is an improvement — and borrowed funds cannot be used to fund it.
If borrowed funds are applied to improvements, the LRBA ceases to satisfy the conditions of section 67A and the trustee may be in contravention of the borrowing prohibition in section 67(1). The fund's own (non-borrowed) money can be used for improvements, but the compliance interaction between borrowed and non-borrowed funds in this context requires careful professional management.
The Lender Market: Why Non-Banks Dominate
The major Australian banks substantially withdrew from SMSF lending in the late 2010s. The withdrawal followed a series of regulatory reviews, internal risk assessments and reputational concerns about the product being sold inappropriately to retail superannuation members. By the early 2020s, the major banks' SMSF lending books had either been wound down or closed to new origination.
The market today is dominated by non-bank lenders — specialist SMSF lenders, some second-tier banks and a small number of private credit providers. This structural shift has several practical consequences for borrowers:
- The product is available, but the borrower pool is narrower and the credit assessment more detailed than for standard investment loans.
- Interest rates on SMSF loans carry a premium over equivalent non-SMSF investment loans in the same lender category, reflecting the additional compliance burden and smaller lender pool.
- Loan-to-value ratios are generally lower than for standard investment mortgages — indicatively 60% to 70% for residential property and often lower for commercial, as at June 2026 — though exact LVRs vary by lender, asset type, fund size and borrower profile.
- Lenders typically require the fund to hold a minimum liquidity buffer after settlement, so the fund retains capacity to service the debt without selling the asset.
These figures are indicative category observations only, not quotes or offers. Any specific terms depend on the lender, the fund, the asset and prevailing conditions.
Typical Lender Requirements
The requirements imposed by non-bank SMSF lenders vary, but common themes include:
| Requirement area | What lenders commonly assess | Indicative position (June 2026) |
|---|---|---|
| LVR — residential | Property value at settlement | Indicatively 60%–70% of purchase price/valuation |
| LVR — commercial | Commercial property value, lease terms, tenant quality | Indicatively 60%–65%, some lenders lower |
| Fund size / liquidity | Existing super balance, contribution inflows, cash buffer | Minimum buffer post-settlement, varies by lender |
| Serviceability | Rental income + contributions vs loan repayments | Assessed on fund cash flow, not personal income alone |
| SMSF documentation | Trust deed, investment strategy, compliance history | All required at application; audited fund preferred |
| Bare trust documentation | Correctly executed bare trust deed | Must be in place before settlement |
These are indicative frameworks only. Lender appetite, minimum fund size and LVR ranges change. Rates on SMSF loans are generally above standard investment loan rates from the same category of lender, reflecting the product's complexity and the smaller lender market.
Residential vs Commercial Property in SMSFs
Both residential and commercial property can be held inside an SMSF under an LRBA, but the rules differ in important ways.
Residential Property
Residential property can be acquired by an SMSF under an LRBA, but it cannot be leased to, or used by, a member of the fund or any related party of the fund. This flows from the in-house asset rules and the sole purpose test. A member's own home cannot be sold into their SMSF and leased back. The residential property must genuinely be held for investment purposes for the fund's members as a whole.
Commercial Property and Business Real Property
Commercial property used wholly and exclusively in a business — what the ATO calls "business real property" — can in certain circumstances be leased from the SMSF by a related party of the fund (for example, a member's business). This is an exception to the general in-house asset rules and it is one of the reasons commercial property inside an SMSF can appeal to business owners. The lease must be on arm's length terms at market value. The ATO publishes detailed guidance on what qualifies as business real property and SMSFR 2009/1 addresses the definition in depth. This is a complex area and specialist advice is essential.
The Sole Purpose Test
Every investment an SMSF makes — including property acquired under an LRBA — must satisfy the sole purpose test in section 62 of the SIS Act. The fund's sole purpose must be to provide retirement benefits to members, or death benefits where a member dies before retirement.
In the context of property lending, the sole purpose test is engaged where a trustee acquires property that also provides a current-day benefit to a member or related party — living in it, leasing it at below-market rates, or using it for personal purposes. Any such arrangement is a potential breach. The ATO publishes detailed guidance on the sole purpose test in SMSFR 2008/2 and on its website.
In-House Assets and Related-Party Acquisition
The SIS Act restricts SMSF investments that constitute "in-house assets" — broadly, investments in or loans to related parties of the fund — to no more than 5% of the fund's total assets. The asset acquired under an LRBA from an unrelated vendor and held in the bare trust is not itself an in-house asset, but various transactions around the LRBA can create in-house asset issues if structured incorrectly.
Acquiring an asset from a related party under an LRBA is also subject to restrictions. Generally, an SMSF cannot acquire assets from related parties unless a specific exemption applies — business real property is one such exemption. The general prohibition means that a member cannot sell a residential investment property into their own SMSF (even at market value) and then have the fund borrow to fund the purchase. The rules here are layered and regularly misunderstood; published ATO guidance and specialist advice are both essential.
What Happens at the End
When the loan is fully repaid, the bare trustee transfers legal title in the property to the SMSF trustee. This is the intended conclusion of the structure and the bare trust is then wound up. Until that transfer, the SMSF holds only beneficial ownership — it cannot deal with the asset, encumber it, or refinance it into a different structure without careful regard to the SIS Act conditions that must continue to be met.
Some funds repay the LRBA through a combination of rental income, contributions and investment earnings. Others sell the property before the loan term ends and repay from sale proceeds. The SIS Act does not mandate a particular repayment pathway, but the fund's investment strategy must reflect how the asset is intended to be held and ultimately realised.
Frequently Asked Questions
What is a limited recourse borrowing arrangement in an SMSF?
A limited recourse borrowing arrangement (LRBA) is the mechanism under section 67A of the Superannuation Industry (Supervision) Act 1993 by which an SMSF trustee can borrow money to acquire a single acquirable asset, held in a separate bare trust. 'Limited recourse' means that if the borrower defaults, the lender's recourse is limited to the asset held in the bare trust — other fund assets are protected. The SMSF holds the beneficial interest during the loan term and takes legal title once the debt is fully repaid.
Can borrowed SMSF funds be used to renovate a property?
Borrowed funds under an LRBA can be used for repairs and maintenance but not for improvements. The ATO's position, set out in SMSFR 2012/1, is that improvements change the character or function of the asset relative to what it was at acquisition — and borrowed funds cannot be applied to that purpose. The fund's own (non-borrowed) money can fund improvements. The distinction between repair and improvement can be a fine line and the ATO publishes detailed guidance on how it draws it.
Why have most major banks left the SMSF lending market?
The major banks substantially withdrew from SMSF lending in the late 2010s following regulatory scrutiny and internal risk reviews. The market is now dominated by non-bank lenders, specialist SMSF lenders and some second-tier lenders. This means borrowers typically need to approach the non-bank market, which carries different credit criteria, indicatively lower LVRs and rates that are generally higher than standard investment loans.
What happens to the property title when an SMSF loan is repaid?
During the loan term, legal title sits with the bare trustee of the holding trust, not with the SMSF itself. When the loan is fully repaid, legal title transfers to the SMSF trustee. This transfer is the intended endpoint of the LRBA structure. The ATO and ASIC both publish guidance on the mechanics of this process. A licensed adviser and SMSF-specialist solicitor should be involved in setting up and unwinding the structure.
Mapping the SMSF Lending Market
Because the major banks have largely exited SMSF lending, identifying which non-bank lenders are active and what their current criteria look like requires searching the non-bank market. The free SMSF Lending tool at lenderbridge.com.au/smsf-lending maps the shape of a proposed borrowing against the published criteria of lenders active in this space.
Before using any matching tool or approaching a lender, obtaining licensed financial advice is strongly recommended. SMSF borrowing decisions are among the most consequential a fund trustee will make. ASIC's MoneySmart website and the ATO's SMSF guidance pages are both useful starting points for understanding the regulatory framework before engaging an adviser.
General information only — not credit assistance, financial product advice or superannuation advice. Establishing an SMSF and entering a limited recourse borrowing arrangement are significant financial decisions; licensed financial and legal advice is strongly recommended. ASIC and the ATO publish detailed guidance on SMSF requirements. LenderBridge connects borrowers and lenders; it does not advise or recommend. Figures are indicative as at June 2026 and may not reflect your circumstances — verify with a licensed professional.