If your self-managed superannuation fund has entered into or is contemplating a limited recourse borrowing arrangement (LRBA) with a related party lender, the terms and features of the LRBA should at all times be consistent with and benchmarked against those of an arm’s length lender if you wish to ensure that top rate taxation (47% in the 2016 income year) does not apply to the fund under the non-arm’s length income (NALI) provisions.
Benchmarking can be difficult and if not undertaken properly won’t provide a guaranteed safe harbour for the super fund.
On 6 April 2016, the ATO released a Practical Compliance Guideline which helpfully sets out ‘safe harbour’ features of a LRBA that are acceptable to the Commissioner, such that the compliant loan terms and features themselves would not cause the NALI provisions to apply. See PCG 2016/5.
To highlight some of the key benchmarks where the LRBA asset is real property:
- Maximum 70% loan-to-value ratio for both commercial and residential property.
- Maximum 15 year loan term. The maximum fixed interest period is 5 years and must commence at the start of the loan term.
- Interest should be charged at the Reserve Bank of Australia Indicator Lending Rates for banks providing standard variable housing loans for investors (e.g. 5.75% for the 2016 income year).
- Repayments must be monthly and consist of both principal and interest.
- A registered mortgage over the property is required. A personal guarantee is not required.
While this Guideline applies to LRBAs whether commenced before or after 6 April 2016, the examples and options in the Guideline suggest that super fund trustees must get their existing LRBAs in order by 30 June 2016 at the latest.
All SMSF clients with related party loans should be advised to read this Guideline and should review the terms and features of their LRBAs carefully as soon as possible. Jackson McDonald has numerous clients with related party LRBAs and therefore we are well placed to advise you should you need to amend or refinance your LRBAs and take appropriate remedial steps as required. We can assist with remedial action under a fixed fee service arrangement in many cases.