Limited recourse borrowing arrangements (LRBA) ATO Safe Harbour Terms
(if you or a related entity lent your SMSF funds to purchase an asset under LRBA)
The ATO has taken the view that these arrangements may trigger the non-arm’s length income (NALI) and income from these assets is taxed at 47%. The income includes the advantaged expense (reduction in interest).
In the past, the ATO have been unclear on their view, even at one stage indicating that a loan with terms and conditions including a 0% interest rate would be OK, and those too good to be true terms are now coming unstuck.
The ATO have now issued ATO PCG 2016/5, which specifies the arm’s length terms for these types of LRBAs and have dubbed them the Safe Harbour Terms.
Meeting the Safe Harbour Terms
If SMSF trustees want to shelter they must meet all the conditions to be protected, but if they don’t it doesn’t necessarily mean that NALI will be triggered, it just means that they need to ensure they can clearly demonstrate that they are dealing at arm’s length. To do this they need to collect information from a third party willing to lend, preferably a financial institution.
What is a Safe Harbour?
The ATO have provided the following guidance on only two types of assets, real property and listed securities. No other types of assets will fall within the safe harbour.
However, this concession is conditional on SMSF trustees ensuring that all existing LRBAs are on terms consistent with the new “Safe Harbour” terms by 30 June 2016, but have up until 1 January 2017 to have all payments squared away, including the principal and interest. This may make it difficult for some SMSF trustees and the ATO have suggested that they should consider refinancing with a commercial lender, payout the LRBA which may mean that some assets may need to be sold.
Also worth noting, not only for existing LRBA’s but for those considering LRBA’s, the proposed restrictions on Superannuation Thresholds (May 2016 budget) may impact on planning when entering into a long term strategy, such as a LRBA. In other words it seems pointless, for example, to enter into and LRBA(s) that projects to take balances over those limits given all factors including inflation over the period of the strategy.
The above information is generic and is not advice as each and every situation is unique, therefore please seek specific advice if these provisions apply to your situation.
If you need assistance or advice on a LRBs , please give me a call!
LIZ GIBBS – SMSF MANAGER