Borrowing by SMSFs continues to increase in popularity, no doubt driven by record low interest rates and the desire to diversify (particularly into commercial property) among other reasons. SMSFs are generally not permitted to borrow, however an exception exists which allows acquisition of certain assets under a Limited Recourse Borrowing Arrangement (LRBA). Conditions that the LRBA must satisfy include: Borrowed monies must be used to acquire a single asset or a collection of identical assets that have the same market value (e.g. a collection of shares in the same class in a single company) – this is referred to as an ‘acquirable asset’ The acquirable asset must be held on trust (by a bare trustee) so that the SMSF trustee acquires a beneficial interest in the asset The fund has a right to acquire legal ownership of the acquirable asset by making one or more payments after acquiring the beneficial interest The rights of the lender in connection with the borrowing are limited to the acquirable asset (limited recourse). The structure of a LRBA can become quiet complex, however in my experience, as long as the trustees have sought appropriate advice before entering into the transaction, it is not usually a difficult area to audit. In fact, one of the first things I look for when I audit a fund with a LRBA is whether the trustees sought professional advice. The provision of certain key documents to audit can give me some comfort over this, including: Evidence that the asset being purchased is allowed under the legislation The Bare Trust Deed (or equivalent) Evidence that ownership of the asset held by the bare trustee, in trust for the fund Signed loan agreement – containing the limited recourse borrowing caveat. I also check that the trust deed and investment strategy allow for an investment under a LRBA. If the borrowing is from a related party – the terms must be on an arm’s length basis. There has been a lot of publicity around related party loans lately but that is a topic for another blog! If appropriately structured, the use of a LRBA can provide your SMSF more investment options. However, it is important to consult with an expert before entering into any LRBA transactions.