On 6 April 2016, the ATO released Practical Compliance Guide PCG 2016/5, titled as the ‘Safe Harbour’ guidelines (“the Guidelines”). The Guidelines set out how Self Managed Super Fund (“SMSF”) trustees and professionals can ensure that any related party loan in a Limited Recourse Borrowing Arrangement (“LRBA”) is consistent with arm’s length dealings.
There are two overarching methods of complying with the Guidelines:
- Comply with the provisions of the Guidelines; or
- Re-finance the loan with a commercial financier.
What are the provisions of the Guidelines?
The Guidelines provide terms dealing with two types of assets acquired under an LRBA; real property, and listed shares or listed units in a unit trust. The loan conditions necessary to comply with the Guidelines depend on which category of asset is being acquired under the LRBA. The appropriate loan conditions, as outlined below, must be contained in a written executed loan agreement.
|Loan Condition||Real Property LRBA||Listed Shares or units LRBA|
|RBA standard variable housing loan for investors 5.75% for 2015/16||RBA standard variable housing loans for investors + 2% = 7.75% for 2015/16|
|Term of Loan:||Max 15 years||Max 7 years|
|Loan to Value Ratio:||
Max 70% (aggregate of all loans)
|Security:||Registered mortgage||Registered Charge|
|Type of repayment:||Principal + interest||Principal + interest|
|Frequency of repayment:||
What about assets that don’t fit into those categories?
Only the two categories of assets listed above are covered by the Guidelines. This would mean that for an LRBA, where the underlying asset was any other variety of asset, the Guidelines could not be used to determine that the dealings were definitively at arm’s length.
What happens if I fail to follow the Guidelines?
If the Guidelines are not followed and the LRBA is ongoing, the ATO may select an SMSF for a review purely based on it having an LRBA for the 2014/15 or earlier year. If the Guidelines are not followed, the trustees will need to demonstrate that the arrangement was entered into and maintained on terms which are consistent with an arm’s length dealing.
When do I have to comply by?
SMSF trustees previously had until 30 June 2016 to comply with the Guidelines. Recently this time limit was extended to 31 January 2017. As this date has already passed, the sooner the trustees can organise to meet the Guidelines, the better for the SMSF and its members. This is however, easier said than done.
Hurdles along the way.
Structuring your LRBA so as to meet the requirements is perilous and professional advice ought to be sought prior to adjusting your borrowing arrangements. A good example of the difficulties of meeting the loan conditions is the requirements regarding loan to value ratio (“LVR”). For real property the maximum LVR is 70%, and for listed shares or units, the maximum is 50%. A real property asset which is valued at $500,000.00 and has a loan against it of $450,000.00 has an LVR of 90%. In order to meet the requirements outlined in the Guidelines, the SMSF members would need to repay a loan amount of $100,000.00. Until this is done the LRBA will be deemed non-complying with the Guidelines and will be at risk of audit (and penalties).
Contact Irish Bentley Lawyers
Irish Bentley Lawyers have considerable experience in Australian taxation law obligations, compliance assessment and litigation. If you are concerned that your SMSF arrangements may be non-compliant you should seek professional advice without delay.
Please note that the above does not constitute legal advice and Irish Bentley Lawyers make no representations or warranties as to the accuracy of any of the information contained herein. If you have a taxation issue, then please do not hesitate to contact the team at Irish Bentley Lawyers – there is no substitute for proper legal advice based on your individual and unique circumstances.