The ATO, recently released guidance statement PCG 2016/5 which changes the terms for related party Limited Recourse Borrowing Arrangements (LRBAs). This Guideline sets out the ‘Safe Harbour’ terms on which SMSF trustees may structure their related party LRBAs for income tax compliance purposes, (ie loans from family trust or private company). Note that Unnrelated party LRBAs (ie Bank Loans) are not impacted
The LRBA changes:
- Interest rates must be set at 5.75% for property and 7.75% for shares (rates will be reviewed each subsequent May)
- For Property, the terms of the loan must be a maximum of 15 years. Loans can be fixed for a maximum of 5 years then convert to variable
- The loan to Value Ratio is 70% for property and 50% for shares
Date of effect
This Guideline comes into effect on 1 July 2016 and applies to all SMSF trustees who have established related party LRBAs regardless of whether the arrangement commenced
What do Trusteed need to do
Prior to 30 June 2016 Trustees must either:
- Ensure that the LRBA is on terms that are consistent with an arm’s length dealing,or
- End the LRBA arrangement by repaying the loan
Comment
The timing of the guidance may prove difficult for some trustees to put in place the new arrangements prior to 30 June which causes some concerns around the potential tax implications of not meeting the guidelines
The aim of the change appears to be to align lending arrangements with banks which are in the business of making money. Most elated party loans would be on more favourable terms to the SMSF.
A rule that actually forces a SMSF to pay higher interest to a related party, thus penalising the SMSF and benefiting the related party seems to fly in the face of the sole purpose test which is to maximise member benefits,
The full details of the guidance can be found on our website smsfengine.com.au/forms