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ATO, Compliance & Regulation

A new break for LRBAs

LRBA structure

SMSF trustees may have more ways to structure a LRBA without breaching legislation under a new ATO legislative instrument

The ATO is looking to introduce a new legislative instrument that will expand the methods an SMSF can use to structure a limited recourse borrowing arrangement (LRBA) without breaching the Superannuation Industry (Supervision) (SIS) Act, a specialist lawyer has said.

The new ATO legislative instrument will be designed to cover situations, classified as intermediary LRBAs, where the loan for the LRBA has been taken out by the bare trust with the SMSF agreeing to maintain the borrowing.

“So effectively what the new rules are designed to do is fix up an anomaly as to how the [current] legislation works because even though the fund could maintain borrowing where the bare trust borrows and comply with section 67A [of the SIS Act], it still breaches the in-house asset rules,” Cooper Grace Ward partner Clinton Jackson said during his firm’s recent SMSF conference.

“That’s because the in-house asset rules have a specific clause in them that says to be exempt from those rules the super fund must have borrowed the money, not the bare trust.

“So what the ATO is proposing to do is to introduce a new legislative instrument, so it doesn’t have to go before parliament, that will give a further exemption from the in-house asset rules regardless of [whether the SMSF or the bare trust borrows the money].”

Jackson said individuals are keen to use an intermediary LRBA structure as generally the banks will impose a more favourable interest rate in these situations because it is not subject to the limited recourse requirement due to the fact money is not directly loaned to the SMSF.

“[In effect the new rules] may give access to other ways to fund these arrangements and it may entice some of the banks that have removed themselves from this market to come back in, given they don’t have to jump through the same hurdles [associated] with how they used to structure the loans,” he noted.

Fellow Cooper Grace Ward partner Scott Hay-Bartlem warned while the new legislative instrument would allow intermediary LRBAs to more easily comply with the SIS Act, some potential associated legal issues still exist with them.

“One of the concerns I’ve got is having seen some of these intermediary [LRBA] documents, we’re not telling the bank a super fund is involved,” Hay-Bartlem said.

With reference to this point, Jackson said there was a danger individuals may not be complying with their disclosure requirements under the law when using this type of borrowing structure.

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