Six Important Points

21 April 2016

Six important points need to be made in relation to the guidelines.

1.    The safe harbour guidelines presuppose that the fundamental requirements for LRBAs are satisfied (ie that they comply with s67A requirements or the predecessor requirements set out in s67(4A)) and it is only the terms of the arrangement are non-commercial.  For example if

  • if the single acquirable asset rule has been breached
  • if the borrowing has been undertaken by the holding trustee and not the trustee of the SMSF, or
  • if the asset is not held in a holding trust while the loan is on foot

complying with the safe harbour guidelines is no guarantee that the arrangement will not be challenged by the ATO.

2.    Just because an LRBA with a non-commercial lender is outside the guidelines does not automatically mean that the arrangement will be treated as generating non-arms’ length income – there remains the possibility of justifying the terms of the arrangement by benchmarking the terms of the arrangement against the market place of actual loans.

3.    Once in harbour the arrangement must stay within the harbour.  It is not simply rectifying the terms of the arrangement – the terms must remain rectified for the duration of the loan and there must be compliance with the rectified terms.

4.    While the terms are intended as a parameter for non-commercial LRBAs – they do not apply to LRBAs with commercial creditor providers.  However it may be that commercial creditor providers adopt the parameters as being “best practice”.

5.    Time is of the essence.  If action is required, then the relevant action must be implemented before 30 June 2016.

6.    The choice as to which element of an LRBA will be the most financially difficult to rectify is between the LVR element and the interest and principal repayment element.  Many related party LRBAs were established (rather than using a commercial lender) to maximise the borrowed amount through a high LVR.  To reduce an LVR from 90% to 70% will involve repaying 22.22% of the original loan principal (assuming the property has not increased in value since purchase). Neither the superannuation fund nor the members may have access to the necessary level of capital.  Of course if the property has materially increased in value since the loan was taken out then the 90% LVR has been materially reduced.  Do we hear a valuation coming on? Additionally, the obligation to make commercial interest rate payments in respect of the current financial year on the loan is likely to be a significant financial burden.

Back Enquiry