What can be done to minimise the adverse impact of the IDs?

Accepting that the IDs are technically correct (there may be technical arguments against the ATO’s position) or that challenging the ATO would be pointless, affected SMSFs which have LRBA arrangements on foot have the following choices:

• restructure the terms of the current arrangement to bring them into alignment with arm’s length terms;
• refinance the arrangement on acceptable terms; or
• close-out the current arrangement (if either of the above responses are not open) by either repaying the debt or selling the asset.

The better response may be to restructure the current terms: this may involve adjusting the interest rate to an arm’s length rate, requiring periodic repayment of capital and interest (to resemble a principal and interest style of loan) and, if the LVR is an issue, providing additional security by way of personal guarantees or third party security.  Alternatively, the existing loan could be re-financed by a loan from an arm’s length provider.