ATO releases new guidelines for SMSF Trustees for non-bank SMSF limited recourse borrowing arrangements

The ATO have released important information detailing interest rates, loan-to-value ratios (‘LVRs’) and other terms that constitute safe harbours for SMSF limited recourse borrowing arrangements (‘LRBAs’) so that arrangements will be taken to be consistent with an arm’s length dealing. The ATO is officially calling their release a ‘Practical Compliance Guideline’.

Broadly speaking, LRBAs consistent with arm’s length terms should not give rise to non-arm’s length income (‘NALI’). On the other hand, LRBAs that are not consistent with arm’s length terms will attract NALI.

It is important to note here that many refer to non-arm’s length LRBAs as ‘related party’ LRBAs. However, some SMSFs have obtained loans from unrelated parties such as friends that are not related parties that still fall under the ATO’s target of LRBAs that are not on arm’s length terms. Accordingly, in this article we refer to ‘non-bank’ LRBAs.

Accordingly, this ATO Practical Compliance Guideline is critical for:

  1.  SMSF trustees that have already entered into LRBAs as action might be required; and
  2. SMSF trustees that are considering entering into LRBAs,

….that are not financed by a bank.

SMSF trustees that have already entered into non-bank LRBAs might need to revise the terms of the loan or take other timely corrective action by 30 June 2016.

In view of the ATO safe harbours, we strongly recommend that a review be undertaken of every LRBA that is not financed by a bank as soon as practicable and in any event prior to 30 June 2016.

Please get into contact us with us if you feel that you need some help in this area with your SMSF.