Limited Recourse Borrowing After the Budget: What SMSF Trustees Must Change Now

Limited recourse borrowing arrangements (LRBAs) are still allowed for SMSFs after the latest ATO guidance and Budget changes, but the bar for compliance is higher. Your LRBA must have commercial interest terms, clean documentation, properly recorded contributions and a realistic exit plan, or you risk non‑arm’s‑length income (NALI), contribution breaches or forced unwinding.

Here’s how to check your SMSF property loan is still safe — and what to fix this week.

Understanding how the LRBA structure fits around your SMSF is the first compliance step.

1. Where LRBAs stand after recent Budget and ATO shifts

1.1 What has not changed

1. SMSFs can still use LRBAs to buy a single acquirable asset (usually a property) via a bare/holding trust.
2. The limited recourse rule remains: the lender’s rights are limited to the LRBA property and related security.
3. Super law still caps contributions and requires sole‑purpose, diversification and liquidity to be monitored.

For a strategic backdrop on geared property after the latest Budget settings, see /insights/smsf-geared-property-after-latest-budget-reality-check.

1.2 What has tightened in practice

Recent ATO guidance and Budget reforms have not banned LRBAs, but they have:

• sharpened NALI risk for under‑market related‑party loan interest or forgiving debts
• focused audit attention on undocumented top‑ups that are really contributions
• made it harder to justify highly geared, illiquid SMSFs with no clear exit plan
• increased the need to align property strategy with new CGT and negative gearing settings from 2027.

2. Related‑party LRBA loans: interest, terms and documentation

If your SMSF is borrowing from you, your business or a related trust/company, assume the ATO will benchmark it against safe‑harbour style terms.

2.1 Getting the interest rate right

The ATO’s practical view has been: if you follow its safe‑harbour parameters (similar to PCG 2016/5), NALI risk is reduced. That means:

• interest rate broadly aligned to commercial SMSF property lending
• fixed vs variable clearly documented
• no penalty‑style under‑market discounts or interest holidays.

Because rates move, trustees should review the related‑party LRBA rate annually and minute any change.

2.2 Other key loan terms the ATO cares about

These are indicative only — actual safe‑harbour settings change and differ by asset type.

2.3 Documentation to have in place this month

At minimum, have:

• signed LRBA loan agreement on arm’s‑length terms
• bare/holding trust deed matching the property title
• mortgage documentation (registered wherever possible)
• trustee resolutions for each drawdown, refinance or major variation
• evidence of interest and principal actually being paid from the SMSF bank account.

If any of these are missing, prioritise a documentation audit before making more contributions or rent changes. For broader strategy tweaks when rules shift, pair this with the framework in /insights/adjusting-smsf-property-plans-when-rules-change.