What is a limited recourse borrowing arrangement? (LRBAs)

Limited recourse borrowing arrangements (LRBAs) are a type of borrowing structure that allows self-managed superannuation fund (SMSF) trustees to borrow money for the purpose of purchasing an asset, such as property or shares.

There are several parties involved in a Limited Recourse Borrowing Arrangement (LRBA), each with a specific role to play in the borrowing structure.

SMSF trustee: The SMSF trustee is responsible for making investment decisions and managing the SMSF’s assets. In an limited recourse borrowing arrangement, the trustee is also responsible for entering into the borrowing arrangement and ensuring that the loan is used for a permissible purpose. The trustee is also responsible for ensuring that the loan is repaid on time and that the SMSF remains compliant with all relevant legislation and regulations.

Lender: The lender is the entity that provides the loan to the self-managed super fund trustee. The lender may be a bank or other financial institution that specializes in providing SMSF loans. The lender’s recourse is limited to the asset purchased with the borrowed funds. This means that if the SMSF defaults on the loan, the lender can only take possession of the asset purchased with the borrowed funds, rather than pursuing the SMSF trustee for further payment.

Custodian: The custodian is a separate legal entity that holds the asset purchased with the borrowed funds on behalf of the self-managed super fund. The custodian is a crucial component of an LRBA, as it ensures that the asset is held separately from the SMSF’s other assets, and that the lender’s security interest is registered against the asset.

Bare Trustee: The bare trustee is another separate legal entity that holds the legal title to the asset purchased with the borrowed funds on behalf of the self-managed super fund. The bare trustee is a passive entity that does not have any decision-making power, and its only function is to hold the asset on behalf of the SMSF.

In summary, a limited recourse borrowing arrangement involves multiple parties, including the self-managed super fund trustee, lender, custodian, and bare trustee. Each party plays a critical role in ensuring that the borrowing structure is compliant with all relevant legislation and regulations and that the asset purchased with the borrowed funds is held separately from the SMSF’s other assets.

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