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Navigating Super Fund Borrowing Arrangements

Updated: Aug 5, 2021

Self-managed superannuation funds ("SMSF") will often identify property that is suitable for investment. However, the SMSF may not have sufficient cash reserves to acquire the asset. The problem they face is that superannuation funds cannot borrow funds, on ordinary terms, to fund the acquisition of property.


As a general rule, superannuation funds are not permitted to borrow money to invest. However, the Superannuation Industry (Supervision) Act 1993 ("SIS Act") does permit specific types of borrowing arrangements which allow SMSFs to borrow money for investment purposes. These borrowing arrangements are known as 'limited recourse borrowing arrangements'.

A limited recourse borrowing arrangement (LRBA) within a SMSF can allow you to borrow money for investment purposes. However, the rules for limited recourse borrowing arrangements are complex and specific arrangements must be established that comply with the SIS Act.

The below Solution in Action will outline how a SMSF can borrow funds to invest in property by using a special form of Trust that complies with the limited recourse borrowing arrangements in the SIS Act.


Ben and Jane Smith have a SMSF and wish to enhance their investment returns by borrowing money to invest in property. They require a borrowing arrangement that complies with the SIS Act.

Their superannuation fund has available cash reserves of $100,000.00 including any funds which could be made available through contributions.

They have found an investment property with an asking price of $500,000.00. They wish to use their SMSF to borrow funds to acquire the investment property.


Ben and Jane can adopt a strategy using a special form of Trust developed by Cleary Hoare that complies with the limited recourse borrowing arrangements provided by the SIS Act. This is known as a Warrant Trust.

The trustee of the Warrant Trust is a company controlled by Ben and Jane. Ben and Jane are the ultimate controllers of the Trust.

Ben and Jane's SMSF will inject its available cash reserves ($100,000.00) into the Warrant Trust. The SMSF is then able to obtain the remaining $400,000 required to purchase the investment property on limited recourse terms from a lender.

The key features of limited recourse terms are:

  • The rights of the lender, or any other person against the SMSF, as a result of a default on the borrowed funds, must be limited to the asset acquired with the borrowed funds; and

  • The acquired asset must not be subject to any charge or mortgage other than that provided in relation to the borrowed funds.

Due to the limited recourse nature of these loans, many lenders will require a third party to guarantee the loan or indemnify the lender for any losses suffered as a result of a default.

The Warrant Trust uses the funds received from the SMSF and the lender to purchase the investment property on trust for the SMSF so that the SMSF acquires a beneficial interest in the investment property.

The SIS Act provides that the borrowed funds can also be used to pay for expenses incurred in connection with the borrowing, such as:

  • legal fees;

  • loan application fees; and

  • conveyancing fees and transfer duty.

As further funds become available to the SMSF, it can pay down the limited recourse loan. The legal ownership of the asset is transferred to the SMSF after the limited recourse loan has been repaid and the borrowing arrangement comes to an end.

Tax Consequences

The income generated by the investment property must be included in your SMSF's assessable income. Investment earnings in superannuation are generally taxed at 15%.

There is no capital gain tax event when the investment property is transferred back to the SMSF and the arrangement is structured to comply with the requirements of the relevant state duty concessions. Accordingly, the property can be transferred to the SMSF without incurring CGT or transfer duty.


Ben and Jane's SMSF can acquire the investment property by borrowing money through the use of Cleary Hoare's Warrant Trust. This strategy complies with the SIS Act and there are no ongoing fees once the structure is in place (except for professional accounting fees).

Points to Consider

Section 66 of the SIS Act still applies. Therefore, the SMSF is still prohibited from acquiring an asset from a related party of the fund.

This strategy can be used to acquire any kind of asset that a superannuation fund could acquire directly if it had sufficient funds.

Key Takeaway

Establishing a limited recourse borrowing arrangement allows your SMSF to borrow money for investment purposes. This may allow your SMSF to enhance its investment returns by acquiring suitable assets with borrowed funds. The Warrant Trust developed by Cleary Hoare complies with the complex arrangements under the SIS Act that are required to establish a limited recourse borrowing arrangement.

Please contact us if you would like to discuss the benefits and risks involved with establishing a limited recourse borrowing arrangement.


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