LRBA instrument opens door to master funds

master LRBA

Changes to LRBA regulations have opened the door to the creation of master funds with more than one borrowing arrangement.

An ATO legislative instrument aimed at addressing the operation of intermediary limited recourse borrowing arrangements (LRBA) has allowed the creation of master LRBAs, which allow an SMSF to hold multiple assets each within their own lending arrangements, according to an SMSF legal specialist.

Cooper Grace Ward senior associate Steven Jell said the legislative instrument regulated the operations of an intermediary LRBA and allowed a bare trustee to take out the borrowing instead of the SMSF.

Speaking as part of the firm’s Annual Adviser Conference last week, Jell outlined how it had constructed a master LRBA using multiple bare trusts under a single master trust structure.

“We’ve been working on this one for a while now and the master LRBA is where we’ve got one set of documents to enable us to have some mini-trusts operating underneath,” he said.

“We set up the master trust first and have the SMSF and the custodian, and by issuing a single notice, the custodian can go out and acquire additional assets.”

He added any SMSF using this approach needed to ensure all loans were operating within ATO Practical Compliance Guideline 2016/5 requirements and loan-to-value ratios and interest rates were appropriate for the borrowings.

“We end up with one set of documents and a single SMSF having the same custodian for multiple individual bare trusts drawing individual loans under a facility deed from a related-party lender,” he said.

“The nice tweak to this is most clients won’t always have cash available in one individual entity, so we can have separate lending arrangements with individual related-party lenders, but we can issue individual loans out from time to time.

“And the important thing is that for any LRBA, there is a separate trust and every drawdown with the facility arrangement is a separate line.”

Cooper Grace Ward had already developed some of these arrangement for clients and they were also useful for clients looking to loan money to an SMSF to buy securities, he said.

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