By SARAH BLAKE
MANAGER, BUSINESS ADVISORY
Sarah.Blake@williambuck.com

changing lives

The ATO has recently released practical compliance guidelines PCG2016/5 outlining what they consider to be “Safe Harbour” terms to structuring a related party LRBA in a SMSF consistent with a commercial, arm’s length dealing.

Under the guidelines, Trustees are allowed until 30 June 2016 to review and adjust any existing agreements.  After this date, LRBA’s which meet the “Safe Harbour” conditions will be accepted by the Commissioner as an arm’s length commercial dealing.

LRBA’s failing the “Safe Harbour” conditions after 30 June 2016 may have non-arm’s length income (NALI) implications. This means income derived from the asset under the LRBA would be considered NALI and taxed at 47%, even where the SMSF is in pension stage.

While failing the “Safe Harbour” conditions will not automatically mean the SMSF has NALI, Trustees may find themselves required to provide evidence to the Commissioner that the loan has been maintained on a commercial basis.

The below table outlines the “Safe Harbour” conditions:

Asset Type Real Property Listed Securities
Interest Rate RBA Indicator Lending Rates for banks providing standard variable housing loans for investors.
(2015-16 year = 5.75%)
Same as Real Property + a margin of 2%
Fixed / Variable Interest rate may be fixed or variable. Interest rate may be fixed or variable.
Term of Loan Total loan term cannot exceed 15 years (from the time of the original loan date) Total loan term cannot exceed 7 years (from the time of the original loan date)
LVR Maximum 70% LVR for both commercial & residential property.
​Total LVR of 70% if more than one loan.
Maximum 50% LVR.

Total LVR of 50% if more than one loan.
Security A registered mortgage over the property. A registered charge/mortgage or similar security (that provides security for loans for such assets).
Personal Guarantee Not required Not required
Nature & frequency of repayments Each repayment is to be both principal and interest.

​Repayments to be made monthly.

Each repayment is to be both principal and interest.

​Repayments to be made monthly.

Loan Agreement A written and executed loan agreement is required. A written and executed loan agreement is required.

Information sourced from Practical Compliance Guidelines PCG 2016/5

To avoid the SMSF failing the “Safe Harbour” conditions and being liable for NALI tax at 47%, Trustees should consider the following options prior to 30 June 2016;

  • the LRBA is adjusted for terms that are consistent with an arm’s length dealing, and the payments of principal and interest made are made under
  • LRBA terms consistent with an arm’s length dealing
  • the LRBA is re-financed through a commercial lender, or
  • the LRBA is brought to an end.

The practical guidelines apply to real property and listed securities, however at this stage no guidance has been provided on LRBA’s used to invest in an unlisted company or unit trust. The only option for trustees who fall into this category is to benchmark their loan agreement on commercial terms, or pay out the LRBA.