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ATO targets related party LRBAs with Practical Compliance Guideline
Chris Morcom
Partner/Private Client Adviser
18 Apr 2016
The Australian Taxation Office (ATO) has recently released guidance to assist trustees of self-managed super funds (SMSF) to comply with the rule of law.
The guidance is for those SMSFs who have in place a limited recourse borrowing arrangement (LRBA) where the lender is a related party. Trustees who have a LRBA using a lender who is not a related party are not affected by these guidelines.
The reason the ATO has released this guidance was due to concerns around related party lending arrangements, and the possibility such arrangements were not made on an arm’s length basis.
Through its guidance, the ATO has stipulated that related party LRBAs meet a number of requirements. These include; the LRBA must have an interest rate of 5.75 per cent for the 2015-16 year, the term of the loan must be a maximum of 15 years, a maximum Loan to Valuation Ratio (LVR) of 70 per cent, and repayments must be monthly and on a principal and interest basis.
For LRBAs used to purchase shares, the interest rate is 2 per cent above that for property, the maximum LVR is 50 per cent, and the maximum term of the loan is seven years. There are also restrictions around the maximum length of time for which interest rates on the loan can be fixed for both property and shares.
For those trustees with LRBAs that do not comply with the new guidelines, the ATO has given a grace period to the end of June 2016 for them to be either wound up or rectified to comply with the guidelines.
Within the guidelines, the ATO has advised that the existence of an LRBA will not necessarily lead to an audit of the SMSF. In addition, those trustees whose LRBA complies with the guidelines by 30 June 2016 (or who wind up a non-complying LRBA by that date) will not be selected for an income tax review.
However, those not complying with the new guidelines could see the income from their LRBA asset treated as non-arm’s length income and taxed at the top marginal rate of 47 per cent.
Trustees with a related party LRBA should seek advice from a suitably qualified professional to ensure their affairs are in compliance with current legislation. Those seeking more information can read the Practical Compliance Guideline (PCG) 2016/5 on the ATO website, here.
The information provided above is general information only and individuals should seek specialised advice from a qualified financial adviser.
Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.