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
A collection of shares in a stock exchange listed company
A collection of units in a stock exchange listed unit
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
Monthly repayments consisting of both principal
There are different requirements for shares and units, for
example, the loan term should be seven years, a 50% LVR and so
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
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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