Under an LRBA, the SMSF can borrow money to acquire an asset, but the lender's recourse is limited only to that asset in the event of default. This means that if the SMSF defaults on the loan, the lender cannot access the fund's other assets to recover the outstanding amount.
LRBAs are subject to specific rules and restrictions set out in the Superannuation Industry (Supervision) Act 1993 (SIS Act), including limits on the amount of borrowing that can be used, and the requirement that the borrowed funds must be used to acquire a single asset, such as a property, and not to finance general investments or expenses.
LRBAs can provide SMSF trustees with greater flexibility to acquire assets that may be out of reach without borrowing, and potentially provide higher returns over the long term. However, they also come with additional risks, such as interest rate risk and the risk of the asset underperforming or not generating sufficient income to cover the loan repayments.
It's important to note that LRBAs are a complex financial product and not suitable for all SMSF trustees. It's important to seek professional advice from a qualified financial advisor or accountant before considering an LRBA as part of your SMSF investment strategy.