ATO releases Safe Harbour Guidelines

The ATO has just released its Safe Harbour Guidelines in relation to limited recourse borrowing arrangements (LRBAs).  Once the dust has settled SUPERCentral’s lawyers, Townsends Business and Corporate Lawyers will provide their detailed and expert comments in a separate issue of SUPERCentral News.  

However, the following points should be noted:

• The guidelines are intended to provide a safe harbour – arrangements which are not within the guidelines are not automatically “non-commercial”.
• The guidelines do not prevent the terms of a particular arrangement being justified by benchmarking the terms against actual commercial arrangements.
• The guidelines only relate to LRBAs where the acquired asset is real estate (residential, commercial or primary production) or where the acquired asset is a collection of listed shares/securities.  The guidelines do not address LRBAs where the acquired asset are a collection of units in a non-listed unit trust.
• Separate “safe harbour” terms are provided for real estate LRBAs as against listed shares/securities LRBAs.  The latter is a more restrictive and less accommodating harbour.
• The “safe harbour” parameter for real estate LRBAs are: 

- Interest rate at least RBA Indicator Lending Rate for standard variable housing loans for investors (for 2015/16 – this was 5.75%).  

- Repayments must be principal and interest

- Repayments – monthly or more frequently;

- Maximum term is 15 years;  (this term cannot be extended by refinancing)

- Loan can be variable or fixed interest – if the latter then the maximum fixed rate period is 5 years.

- Loan to market value ratio cannot exceed 70%

- Security must be a registered mortgage

- Documentation – written signed loan agreement.

• The “safe harbour” parameters for listed shares/securities LRBAs are:

- Interest rate at least RBA Indicator Lending Rate for standard variable housing loans for investors plus 200 basis points  (for 2015/16 – this was 5.75% plus 2%).  

- Repayments must be principal and interest

- Repayments – monthly or more frequently

- Maximum term is 7 years;  (this term cannot be extended by refinancing)

- Loan can be variable or fixed interest – if the latter then the maximum fixed rate period is 3 years

- Loan to market value ratio cannot exceed 50%

- Security must be a registered charge

- Documentation – written signed loan agreement.

The issue of these Guidelines and also the previous ATO Interpretative Decisions (now issued as ATO ID 2015/27 and ATO ID 2015/28) have essentially removed the basis for policy arguments that LRBAs should be banned and, consequently, have from a policy perspective legitimised such arrangements.  

However, to continue with the maritime theme, all is not plain sailing and there may be rough seas ahead when converting a non-commercial LRBA to being within the relevant safe harbour.