**UPDATE** 30/05/2016 – The ATO has announced the safe harbour deadline is extended to 31 January 2017
The long awaited ATO guidance on what is considered to be arm’s length terms for related party loans to Self-Managed Superannuation Funds (SMSF) has been released. SMSFs have been allowed to borrow through Limited Recourse Borrowing Arrangements (LRBA) since 2007; however, the ATO has been concerned with related party loans that are structured more favourably compared to the general lending market.
This has resulted in the ATO taking the view that a SMSF may derive ‘non arm’s length income’ (which is taxable at 47%) if the terms of the LRBA are not on arm’s length terms. The ATO’s Practical Compliance Guideline PCG 2016/5 outlines the loan terms required to meet the safe harbour provisions and not have income from the LRBA being tax at the higher rate.
What are the safe harbour provisions?
Broadly, the safe harbour provisions for all related party loans to SMSFs are:
| Real property | Listed securities | |
| Interest rate | Reserve Bank of Australia (RBA) Indicator Lending Rates for banks providing standard variable housing loans for investors (5.75% for the 2015-2016 year) | Same as real property + 2% |
| Term of loan | 15 years for original loan (any refinancing will be reduced by the previous loan duration) | 7 years for original loan (any refinancing will be reduced by the previous loan duration) |
| Loan to value ratio (LVR) | 70% | 50% |
| Security | Registered mortgage | Registered charge (or similar) |
| Personal guarantee | Not required | |
| Repayments | Monthly principal and interest repayments | |
| Loan agreement | Written and properly executed agreement | |
When do the safe harbour provisions take effect?
The safe harbour provisions apply to all existing LRBAs as at 30 June 2016 (and will also apply to all future LRBAs) that have a related party loan.
The ATO has confirmed that they will not select a SMSF that as a LRBA for review provided the LRBA is on arm’s length terms by 30 June 2016. Importantly, this means your SMSF must have made all principal and interest repayments consistent with the safe harbour provisions by 30 June 2016.
What if your existing SMSF borrowing doesn’t meet the safe harbour provisions?
There are several options available to your and these are outlined in the ATO PCG 2016/5 as follows:
- Amend the loan terms so they are consistent with an arm’s length dealing by 30 June 2016.
- Wind up the LRBA by 30 June 2016.
- Refinance using a commercial lender by 30 June 2016.
Importantly, this doesn’t mean an LRBA is not on arm’s length if the SMSF borrowing does not meet all of the safe harbour provisions. The ATO does accept the view that alternative loan terms can be appropriate. Nevertheless, you will need to demonstrate to the ATO that the LRBA was entered into and maintain on terms consistent with arm’s length arrangements. For example, you might have evidence where a bank is prepared to lend on terms essentially the same as the related party loan in place.
If you would like to know more about SMSF borrowing or have any concerns about your SMSF compliance please contact Jason McLaren on 0418 800 363 or visit our website at www.axiomsuper.com.au.
The information contained in this article is general in nature and does not take into account your personal situation or objectives. You should not act on this information in any way before seeking professional advice.
