Changes to related party LRBAs – What you need to do

06 April 2016 / By Kris Kitto
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The ATO has today released their safe harbour guidance for SMSFs who have borrowed from a related party under a limited recourse borrowing arrangement (LRBA). Practical Compliance Guidelines PCG 2016/5 outlines exactly what SMSF trustees and their advisers need to do before 30 June 2016 to ensure their related party LRBAs are OK and are considered arms-length.

Basically any SMSF with a related party LRBA before 30 June 2016 needs to ensure that they meet the conditions of what is an 'arms-length' commercial arrangement. Options available to SMSF trustees are:

  1. Pay out the related party LRBA in full before 30 June 2016
  2. Re-finance the related party LRBA to a commercial lender
  3. Adjust (where necessary) the existing related party LRBA to meet the safe-harbour requirements
  If an SMSF fails to meet the safe-harbour requirements it is possible that the income generated from the asset will be considered non-arm's length income (NALI) which means the income will be taxed a the highest marginal tax rate of 47 cents in the dollar.

The safe-harbour requirements for related party LRBAs:

The ATO will accept that a related party LRBA structured in accordance with this Guideline is consistent with an arm’s length dealing and that the NALI provisions do not apply purely because of the terms of the borrowing arrangement. Essentially the terms are as follows:
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Table courtesy of Daniel Butler / SMSF Adviser article 6 April 2016: A detailed look at the ATO's new LRBA guidance



 

What advisers need to do:

30 June 2016 is less than three months away.  The first action item is to review any existing related party LRBAs and compare them to the requirements in the above table. Where a related party LRBA does not meet the safe-harbour criteria in the ATO's PCG 2016/5 a decision needs to be reached on what strategy (pay out, re-finance, adjust) will be used. There are a number of factors to consider when it comes to the practicalities of  addressing related party LRBAs including:

  1. What is the market value of the property or asset?
  2. Does the SMSF have sufficient cash to reduce the LVR if necessary?
  3. Is the asset real property or a listed security - do the safe-harbour provisions even apply?
  4. Is the client willing to adjust the agreement and what impact will this have on the related party lender?
  5. If the term of the loan is being shortened how will this impact the cash flow of the SMSF borrower?
  6. Is the original reason to why the related party LRBA established still applicable?
  7. Is it in the clients best interests to pay out / re-finance / adjust the related party LRBA?


Conclusion on related party LRBAs

The use of related party LRBAs is still a very viable strategy for certain clients and this guidance from the ATO provides clarity on exactly what is expected to avoid non-arm's length income issues. To read the entire Practical Compliance Guidelines PCG 2016/5 from the ATO visit their website here: https://www.ato.gov.au/law/view.htm?DocID=COG/PCG20165/NAT/ATO/00001

Kris Kitto
About The Author

Kris Kitto

Kris Kitto - Director at Superfund Wholesale. I really enjoy the opportunity to collaborate with other professionals, especially those who are pushing some boundaries and delivering their services in a new and fresh way. I truly believe that for us to move our industry forward, we need to focus on what COULD BE rather just accepting what we have in the present. That ideal of not being constrained by history, and looking to the future, is a big part of what I bring into our business and also the businesses of professionals I work with. Follow me on Twitter