Commercial Law – ATO Deadline Extension for Self Managed Super Funds with LRBA’s

The ATO has extended the 30 June 2016 deadline for SMSF trustees that have a related party loan under an LRBA (limited recourse borrowing arrangement) to ensure that the related party loan is on commercial terms or complies with the safe harbour guidelines.   The deadlines have been extended to 31 Jan 17 and we recommend that all LRBA’s be reviewed for compliance with these new guidelines.

Under the practical compliance guidelines released by the ATO there are two methods to ensure that a related party loan in a LRBA is treated as commercial, known as the ‘safe harbour guidelines’:

1. Ensure your terms and conditions of the loan align with the guidelines; or

2. Re-finance the loan with a commercial financier.

The ‘safe harbour’ guidelines have different terms depending on the nature of the asset being acquired under the LRBA.  The guidelines deal specifically with real property and listed shares or listed units in a unit trust and no other type of asset.  Further, these terms must be outlined in a written executed loan agreement.

Safe harbour guidelines:

Loan ConditionReal Property LRBAListed Shares or units LRBAInterest RateRBA standard variable housing loan for investors 5.75% for 2015/16RBA standard variable housing loans for investors + 2% = 7.75% for 2015/16Term of LoanMax 15 yearsMax 7 yearsLVRMax 70% (aggregate of all loans)Max 50%SecurityRegistered mortgageRegistered ChargePersonal guaranteesNot requiredNot requiredType of repaymentPrincipal + interestPrincipal + interestFrequency of repaymentMonthlyMonthly

Compliance with these safe harbour guidelines is not mandatory.  However, to demonstrate your arrangement is commercial and consequently the income from the LRBA not treated as non-arm’s length income (NALI), you will need to have documentary evidence that related party loan terms and conditions are generally the same as those available from a commercial financier.

Therefore all existing LRBAs with a related party loan should be reviewed and either:

1. Comply with the ATOs safe harbour guidelines for the 2015/16 financial years (compliance will ensure that previous years will not be assessed as (NALI);

2. Ensure that 2015/16 repayments meet the ATOs safe harbour guidelines and refinance with a commercial lender;

3. Repay the related party loan in full; OR

4. Have documentary evidence that the LRBA related party loan terms are equivalent to a commercial lender’s terms.