It is strongly recommended that non-bank SMSF limited recourse borrowing arrangements (“LRBAs”) be reviewed to ensure compliance with the safe harbour guidelines published by the ATO last week (see PCG 2016/5).
Income generated from a non-bank LRBA asset that does not comply with the guidelines may be subject to the non-arms length income (NALI) provisions in section 295-550 (5) of the Income Tax Assessment Act 1997. Being outside the safe harbour guidelines doesn’t necessarily mean the LRBA is not at arms-length but the ATO may take that view.
The guidelines are limited to real property and stock exchange listed shares or units.
In a nutshell, the ATO accepts that a non-bank LRBA used to acquire real property is consistent with an arm’s length dealing if each of the following applies:
1. RBA Indicator Lending Rates for standard variable housing loans for investors is used
2. Fixed or variable rates
3. Term of loan no more than 15 years
4. The loan to market ration (LVR) must not exceed 70%. The ATO has allowed the asset to be valued as at 1 July 2015 which may assist in lowering the LVR.
5. There must be a registered mortgage
6. Payments are to be principal and interest with monthly repayments
7. A written and signed loan agreement is required.
Slightly different terms are applicable for listed shares or units.
The guidelines provide the following options by 30 June 2016:
• Option 1 – change the terms so that they are consistent with an arm’s length dealing by 30 June 2016;
• Option 2 – Bring the LRBA to an end by 30 June 2016;
• Option 3 – Refinance to a commercial lender by 30 June 2016.
Further, payments of principal and interest for the year ended 30 June 2016 must be made under non-bank LRBA terms consistent with an arm’s length dealing. Trustees with concerns about making these payments can contact the ATO to discuss their circumstances.
The ATO states it will not select a SMSF for review purely because it has entered into a LRBA.
If you need any assistance please call or email Linda Alexander.