A reminder for SMSFs with non-bank LRBAs - 30 June is just around the corner!
In our last update, 'SMSFs beware - Are your related party borrowings at arm’s length?', we reported on the need for SMSFs with non-bank limited recourse borrowing arrangements (LRBAs) to take action before 30 June 2016 to ensure those transactions are fully reflective of arm’s length arrangements. That may mean bringing those LRBAs to an end and possibly refinancing with a bank or other lender by 30 June, 2016.
The Australian Tax Office recently released a Practical Compliance Guideline detailing interest rates, loan-to-value ratios (LVR) and other terms that create ‘safe harbours’ for SMSF LRBAs. Taking the safe harbours on board is vitally important so that arrangements will be taken to be consistent with an arm’s length dealing and won’t attract non-arm’s length income (NALI).
It’s important to note that the safe harbours referred to in the Practical Compliance Guideline only relate to the following assets:
- Real property
- A collection of shares in a stock exchange listed company
- A collection of units in a stock exchange listed unit trust
The safe harbours differ depending on the type of asset. For example, in regards to real property there must be:
- A registered mortgage in place
- A 70% LVR
- An original loan term of 15 years
- Interest rates reflective of the Reserve Bank of Australia Indicator Rates for banks providing standard variable housing loans for investors
- Monthly repayments consisting of both principal and interest.
There are different requirements for shares and units, for example, the loan term should be seven years, a 50% LVR and so on.
For assets which don’t fall under one of the above groups (for instance, units in a related trust) we don’t have the benefit of safe harbours to guide us – putting the onus on the SMSF to gather sufficient evidence to support the arm’s length nature of the terms of their LRBA to avoid NALI arising.
Advisors should understand that not all non-arm’s length LRBAs are ‘related party’ LRBAs. It may be the case that if SMSFs have obtained loans from unrelated parties (such as friends) that they will still be caught out if they don’t meet the safe harbours.
We recommend that advisors urgently familiarise themselves with the terms of the Practical Compliance Guideline and contact clients who have LRBAs that don’t meet the safe harbours to advise them to take immediate action to either vary their loan terms so they are in line with an arm’s length dealing, end the LRBA or refinance with a commercial lender.
Remember, whichever option is taken, it needs to take place on or before 30 June, 2016. If you have any questions or would like more information please contact:
Rosemary Carreras, Senior Associate
Phone: +61 2 9895 9277