The LRBA structure in 60 seconds

An SMSF can borrow to buy a single acquirable asset — usually a property — under a limited recourse borrowing arrangement, set up under section 67A of the Superannuation Industry (Supervision) Act 1993. The mechanics are:

  1. The SMSF can't legally hold the asset directly while it's geared. So a separate bare trust (sometimes called a custody trust) is set up to hold the asset on the SMSF's behalf.
  2. The SMSF trustee borrows from the bank to fund the purchase.
  3. The bare trust holds legal title; the SMSF holds beneficial title.
  4. If the SMSF defaults, the bank's recourse is limited to the single asset. They can't pursue other SMSF assets.

The "limited recourse" part is what makes the structure attractive to SMSF members but uncomfortable for banks: their security is capped, by law, to the one property. Their natural response is to ask for additional security — and that's where personal guarantees come in.

Why personal guarantees fill the gap

Bank credit policies for SMSF loans typically require a personal guarantee from each member of the fund. The personal guarantee sits outside the limited recourse structure — it's a separate contract between the bank and the member individually, not the SMSF. That means:

  • If the SMSF defaults, the bank sells the property to recover what it can.
  • If there's a shortfall, the bank can pursue the members personally on the guarantee.
  • The members' non-super assets — homes, savings, other investments — are within reach of the guarantee.

This is the trade-off SMSF members are accepting when they go down this path. The fund gets the upside of leveraged investment; the members carry the personal downside.

Does the SIS Act allow it?

Yes. The SIS Act prohibits the SMSF itself from giving security or charging its other assets to support the LRBA — that's what makes the loan "limited recourse." But it does not prohibit members in their personal capacity from giving personal guarantees outside the fund.

The reasoning: a personal guarantee is the member's own asset and obligation, not the fund's. It doesn't expose other SMSF assets to creditor claims, which is what the SIS Act is concerned with. So the structure is permitted, and it's market standard.

That said, the personal guarantee must be drafted carefully so it doesn't accidentally give the bank rights against other SMSF assets. Banks usually use their own SMSF-specific guarantee templates that have been reviewed by tax counsel for SIS Act compliance.

Who needs ILA

Every individual giving a personal guarantee needs ILA. In a typical two-member SMSF with a corporate trustee, that's two guarantees and two ILA certificates. If the trustee is individual rather than corporate, both members are usually trustees as well, and they sign in both capacities — but the personal guarantee still triggers ILA.

The lender may also require ILA from the directors of the corporate trustee even if they aren't strictly members, depending on policy. The bank's loan offer will tell you exactly who needs to attend.

What the meeting covers

An SMSF ILA appointment is usually longer than a residential one — typically 45 to 60 minutes per member — because there are more documents and more moving parts. The solicitor will walk you through:

  • The loan itself — amount, rate, term, and the limited-recourse mechanics.
  • The bare trust deed and how legal vs beneficial ownership works.
  • The personal guarantee — what it covers, when it can be called on, and what assets are at risk.
  • Cross-collateralisation between this loan and any other facilities the SMSF has.
  • What happens at default — sale of the property, shortfall mechanics, and the path from the bank's first letter to enforcement.
  • Tax and contribution implications if the guarantee is called on and members repay personally.

You'll also be asked to confirm that you've taken independent financial advice on whether the SMSF investment is appropriate. ILA solicitors don't give financial product advice — that's the job of your accountant or financial planner — but the bank will want to see both pieces of advice on file.

Practical tips for SMSF buyers

SMSF settlements move slower than residential ones, and ILA is often booked too late. A few suggestions:

  • Get the bare trust deed signed, stamped (where applicable in your state) and dated before your unconditional contract date. ILA on the bare trust is much cleaner if it's already in place.
  • Coordinate your ILA appointment with your accountant — they'll usually want to confirm the structure before you sign.
  • Send the entire bank document pack to your ILA solicitor at least 48 hours before the appointment. SMSF packs run to 100+ pages and the solicitor needs reading time.
  • If your fund has more than two members, book a longer slot. Each member needs individual time on the personal guarantee.

Your next step

If you're setting up an SMSF property purchase, read our broader guide on ILA for SMSF property purchases. For the specifics of mixed-capacity signing, see can you be both the borrower and the guarantor on the same loan.

General information only. This article gives general guidance for Australian borrowers and guarantors. It is not legal advice and does not consider your individual circumstances. For advice on your specific situation, book a paid ILA appointment.