An LRBA is a loan that meets superannuation legislation requirements from a lender to a superannuation fund. The lender can be a bank or a related party of a SMSF ie a loan from a family trust to the family’s SMSF. Such LRBA’s are often on more favourable terms than LRBA’s from banks. The ATO has previously advised that LRBA’s from related parties must be put on arm’s length terms by 30 June 2016.
The ATO has now published a Practical Compliance Guideline PCG 2016/5. PCG 2016/5 sets out the ‘safe harbour’ terms on which SMSF trustees may structure their LRBAs consistent with an arm’s length dealing. For income tax compliance purposes, the Commissioner accepts that an LRBA structured in accordance with the ‘safe harbour’ terms set out in PCG 2016/5 is consistent with an arm’s length dealing and that the non-arm’s length income (NALI) provisions do not apply purely because of the terms of the borrowing arrangement.
For SMSF trustees with LRBAs which do not meet the ‘safe harbour’ terms in PCG 2016/5 they cannot be assured that the Commissioner will accept the arrangement to be consistent with an arm’s length dealing. However, this does not mean that the arrangement is deemed not to be on arm’s length terms. It merely means that there is no certainty provided under the guidelines in the PCG. Trustees will need to be able to otherwise demonstrate that the LRBA was entered into and maintained on terms consistent with an arm’s length dealing, this may include evidence to show that the terms of the particular LRBA replicate the terms of a commercial loan that is available in the same circumstances.
A link to the ATO’s link on further information on limited recourse borrowing arrangement can be found here Limited Recourse Borrowing Arrangements – Questions and Answers
In summary, the terms of the safe harbour guidelines includes but are not limited to the following (please refer to Practical Compliance Guidelines – PCG 2016/5 for additional safe harbour terms):
- The interest rate to use is the Reserve Bank of Australia Indicator Lending Rates for banks providing standard variable housing loans for investors which will be 5.75% for the 2015-16 year for property loans / 7.75% for the 2015-16 year for listed shares/units.
- The interest rate can be variable or fixed with a maximum fixed rate period not exceeding 5 years for property / 3 years for listed shares/units (but measured from when loan was first advanced).
- Maximum loan term of 15 years for real property and 7 years for listed shares/units counting from the start of the loan that is, when the funds were used to acquire the property or listed shares/units.
- Monthly repayments on a ‘principal and interest’ basis.
- Maximum LVR of 70% for both commercial and residential property / 50% for listed shares/units.
- For existing LRBAs, market value of the asset as at 1 July 2015 to be used.
- Security required – registered mortgage over property / a registered charge/mortgage or similar security for listed shares/units.
The Guidelines do not refer to a SMSF borrowing to acquire units in a related trust such as a Regulation 13.22C (SIS Act) unit trust.
Ensure all current LRBAs in place are compliant with the guidelines and safe harbour terms. If not, the terms of the loan will need to be revised or other corrective actions such as refinancing the loan through a commercial lender or paying out the LRBA will have to be undertaken by the due date of 30 June 2016.
Please contact your Blaze Acumen adviser if you have any questions in relation to the above matters and your SMSF.