A limited recourse borrowing arrangement for commercial property does not eliminate the structural complexity introduced by multiple members holding unequal interests.
The fund's trustee structure, the holding trust configuration, and the way lender security is documented all interact with member balances in ways that create compliance risk if structured incorrectly. This becomes particularly relevant when one member contributes most of the deposit or when members intend to adjust their interests over time.
Individual Trustees or Corporate Trustee for the Borrowing Entity
The holding trust in an LRBA must have a trustee distinct from the SMSF trustee, and that trustee must hold the asset on bare trust terms. If your SMSF has a corporate trustee, the holding trust will typically also use a separate corporate entity. If your SMSF uses individual trustees, the holding trust can use the same individuals acting in a different capacity, though this requires careful documentation to maintain the separation required under the legislation.
Lenders typically prefer a corporate trustee structure for both entities because it simplifies documentation, reduces the need to update security when members join or leave, and avoids the need to appoint all individual trustees as borrowers. A change of individual trustees requires consent from the lender and often triggers documentation amendments. A corporate structure avoids this entirely.
Consider a fund with three members holding unequal balances where two members are directors of the corporate trustee. The holding trust uses a separate company with the same two directors. When the third member retires and a new member enters, no change to the borrowing entity is required. The corporate trustee remains unchanged, the security remains unchanged, and the loan continues without lender involvement. The same scenario with individual trustees would require lender consent, new guarantees, and updated mortgage documentation.
How Member Balances Affect Loan Security and Lender Requirements
The LRBA sits at fund level, not member level. The lender takes security over the asset held in the holding trust and typically requires a guarantee from the SMSF trustee. Some lenders also require personal guarantees from individual members, particularly where one or two members hold the majority of the fund balance.
When members hold unequal interests, lenders assess serviceability based on the fund's total rental income and the capacity of the fund to make loan repayments from that income, superannuation contributions, and existing fund assets. Personal guarantees do not change the limited recourse nature of the loan, but they do create a pathway for the lender to pursue individual members if the fund defaults.
The allocation of beneficial interest in the property follows the member balance accounts at the time of acquisition. If one member has a balance representing 70% of the fund and another holds 30%, the beneficial interest in the property acquired under the LRBA is typically allocated in the same proportion. This allocation does not change the fund's obligation to repay the loan or the lender's security position, but it does determine how capital gains, rental income, and eventual sale proceeds are attributed to members.
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SMSF Deed Provisions and Unequal Contribution Arrangements
Your SMSF deed must permit borrowing and must allow members to hold unequal interests in fund assets. Not all deeds include these provisions, particularly older deeds drafted before LRBAs became common. If the deed does not expressly permit unequal interests, the default position is typically that all members hold equal beneficial interests regardless of their contribution.
Where one member intends to contribute a disproportionate amount toward the deposit or loan repayments, this must be documented through the member balance accounts and supported by the deed. The fund's accounts must separately track contributions, income allocations, and asset attributions for each member. The auditor will review this each year to confirm the allocations comply with the deed and reflect the actual financial position of each member.
Some funds attempt to allow one member to build a larger interest over time by making voluntary contributions that are then applied to loan repayments. This is permissible provided the deed allows it, the contributions comply with contribution caps, and the member balance accounts are adjusted accordingly. The member making additional contributions increases their balance, and the proportion of the beneficial interest held by each member shifts as a result.
Related Party Leases and Arm's Length Requirements
Business real property leased to a related party must be leased on arm's length terms. A related party includes a member, a relative of a member, or a business in which a member has a controlling interest. The rent charged must reflect market rates, the lease must be documented, and the terms must be comparable to what an independent tenant would accept.
When structuring an SMSF commercial loan where the property will be leased back to a member's business, obtain an independent valuation of the market rent before entering the lease. The ATO has stated that rent set below market value may indicate a breach of the sole purpose test, as it provides a present-day benefit to the member's business rather than maximising retirement benefits for the fund.
The lease must also be reviewed periodically. Market rent can change, particularly in areas like Sydney's industrial precincts where demand fluctuates with economic conditions. A rent that was arm's length three years ago may no longer be defensible without a rent review clause and periodic revaluation.
Trustee Resolutions and Loan Documentation for Multiple Members
Every LRBA requires a trustee resolution authorising the borrowing, approving the terms, and directing the execution of loan documents. Where the SMSF has a corporate trustee, the resolution is passed by the directors of that company. Where the SMSF uses individual trustees, all trustees must pass the resolution unless the deed provides otherwise.
The resolution should identify the asset to be acquired, the loan amount, the lender, the interest rate structure, and the holding trust arrangement. It should also confirm that the acquisition complies with the SMSF's investment strategy and that the trustees have considered the impact on the fund's liquidity and each member's retirement objectives.
Lenders require this resolution as part of the loan application. They also require certified copies of the SMSF deed, the trust deed for the holding trust, evidence of the member balances, and financial statements for the fund. If the fund has been operating for less than two years, some lenders will also require personal financial statements for the members providing guarantees.
The loan agreement, mortgage, and guarantee documents are executed by the trustee of the holding trust and the SMSF trustee. If individual trustees are used, all individuals must sign. If members hold unequal interests and the lender requires personal guarantees, those guarantees are executed separately by the individual members in their personal capacity, not as trustees.
Capital Gains and Tax Attribution Across Member Accounts
Rental income and capital gains from property held under an LRBA are allocated to members in proportion to their beneficial interest in that asset. This allocation occurs at fund level and is recorded in the member balance accounts. The tax liability sits with the fund, not with individual members, but the after-tax income and gains are credited to the relevant member accounts.
Commercial property held for more than 12 months and sold while the fund is in accumulation phase attracts a one-third CGT discount. If the property is sold after the fund has moved into pension phase and is supporting a pension for one or more members, gains may be entirely tax-free depending on the fund's circumstances. The attribution of the gain to member accounts follows the same proportions as the beneficial interest, regardless of the tax treatment.
When members hold unequal interests, the member with the larger balance receives a correspondingly larger allocation of rental income and capital gain. Over time, this can increase the disparity between member balances unless other members make additional contributions or the fund reallocates income in accordance with a different arrangement permitted by the deed.
If you are considering an SMSF loan refinance after a change in member composition or trustee structure, the lender will reassess the fund's financial position and may require updated guarantees or resolutions. The existing LRBA structure remains in place, but the loan documentation must reflect the current trustee and member configuration. Call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
Can an SMSF with individual trustees borrow for commercial property?
Yes, but the holding trust can use the same individuals acting as trustee in a different capacity, which requires clear documentation. Lenders typically prefer a corporate trustee structure to avoid documentation changes when members join or leave the fund.
How are loan repayments allocated when SMSF members hold unequal balances?
The loan sits at fund level, not member level. Beneficial interest in the property is allocated according to member balances at acquisition. Additional contributions by one member increase that member's balance and can shift the beneficial interest proportion over time if the deed permits.
Do lenders require personal guarantees from all SMSF members?
It depends on the lender and the member balance distribution. Some lenders require guarantees from members holding the majority of the fund balance. Personal guarantees do not alter the limited recourse nature of the loan but allow the lender to pursue individual members if the fund defaults.
What happens to the LRBA if a member leaves the fund?
If the fund uses a corporate trustee, no change to the loan or security is required. If individual trustees are used, the lender must consent to the change and loan documentation may need to be updated. The beneficial interest is reallocated based on the remaining members' balances.
Does a related party lease affect the loan structure?
The lease must be on arm's length terms at market rent, supported by independent valuation. The loan structure itself is not affected, but non-arm's length rent may breach the sole purpose test and create compliance risk with the ATO.
