On 6 April 2016 the ATO released a Practical Compliance Guideline (PCG 2016/5) (Guideline), which indicated features of a limited recourse borrowing arrangement (LRBA) that the Commissioner has determined are within acceptable ‘safe harbour’ limits.
The ATO amended this Guideline and released a consolidated version on 28 September 2016 to coincide with the release of Taxation Determination TD 2016/16 (TD 2016/16). If you are a super fund trustee with related party LRBAs, you will need to read this Guideline in its amended form and review the terms and features of their LRBAs as soon as possible. Key points to be aware of:
- Remedial action should be taken where necessary in order to ensure that the related party LRBA is compliant and does not trigger adverse income tax consequences for the fund under the non-arm’s length income (NALI) provisions (47% tax).
- Expert assistance and advice should be obtained when revising a related party LRBA. TD 2016/16 provides an example of where revising an LRBA to fall within the ATO’s safe harbour limits may still fall foul of the NALI provisions, e.g. where the expected rental income from the relevant property is not sufficient to meet the monthly repayments of both principal and interest required over the maximum 15 year repayment period under the Guideline.
- The due date for taking remedial action was originally 30 June 2016 but on 30 May 2016 the ATO announced that this deadline was extended to 31 January 2017.
To ensure that non-arm’s length income tax treatment (47% tax) does not apply, we recommend that you get in touch with us to kick-start the process.