One of the major issues with LRBAs has been around the terms of
loans from related parties.
While the ATO had been making comments, there remained some
doubt around what would be considered arm's length terms for
related party loans with LRBAs. The ATO has now released PCG 2016/5
to provide guidance on this. It contains safe harbour terms that
the ATO will accept are arm's length, which means the income
from the LRBA will not be considered non-arm's length income to
the SMSF purely because of the terms of the borrowing.
are the safe harbour rules?
When must the LRBA comply by?
The safe harbour rules apply both to existing LRBAs and those
established from now on.
The ATO confirms they will not select an SMSF for an income tax
review for the 2014-15 or earlier years purely because the SMSF has
entered into an LRBA provided that, by 30 June 2016:
all loans are on terms consistent with an arm's length
dealing, or the LRBA is wound up; and
the SMSF trustee has made principal and interest payments for
the 2015/16 year that are consistent with an arm's length
Are there other options?
The ATO accepts that alternative loan terms can be appropriate,
but the onus will be on the SMSF to establish they are consistent
with an arm's length dealing.
The options for SMSFs with LRBAs that have loans from related
parties are to:
ensure the terms of the related party loan comply with the safe
harbour rules by 30 June 2016 (including making principal and
interest payments for the 2015/16 year consistent with an arm's
wind up the LRBA by 30 June 2016 (for example by selling the
asset or paying out the debt and transferring it to the SMSF),
having made principal and interest payments for the 2015/16 year
consistent with an arm's length dealing; or
ensure they have extrinsic evidence that the terms of the
existing arrangement are consistent with an arm's length
dealing (e.g. because they are substantially the same as an offer
of finance from a bank).
Is it just the loan terms to worry about?
The terms of the loan are an important part of an LRBA, but
there are many other rules that are just as important, and a breach
of any of them can result in compliance issues for the SMSF or for
the income from the LRBA to be non-arm's length income to the
SMSF, which will be taxed at the top marginal tax rate.
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