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Safe Harbour Guidelines for Self-Managed Super Funds

SMSF Trustees should be on notice that they have less than 60 business days to ensure that any related party limited recourse borrowing lines to be on the terms set out in the Safe Harbour Guidelines for self-managed super funds. Failure to ensure that all aspects of your LRBA arrangements comply may result in any ordinary or statutory income from the asset which is the subject of the arrangement being taxed as non-arm’s length income, currently 47% for ALL of the years which the arrangement has been in place.

Practical Compliance Guideline PCG 2016/5 was released by the Australian Taxation Office yesterday, 7 April 2016 and sets out the following tables of terms for real property and shares and managed funds loans that the Commissioner will accept are on arm’s length terms. If your arrangements do not comply but you believe they are still on arm’s lengths terms, it is your duty to prove this to the Commissioner.

The Safe Harbour Guidelines for self-managed super funds give trustees until 30 June 2016 to ensure that all related-party LRBA arrangements for the current financial year are on commercial terms, if this is done, the Commissioner will not take any further compliance action against the trustee in respect of that arrangement for any prior year.

It is essential to review the terms of any related-party LRBA your Fund has entered into NOW. If your arrangements do not fit into the ATO issued guidelines you should act not to ensure you are not penalised!

We are able to review any arrangement which you are concerned about and provide guidance prior to the deadline.

The information in this article sets out the general terms of the guidelines. The details are complex and will differ for each individual arrangement. Our comments in this article do not constitute legal, taxation or financial advice. You should contact your professional advisers to ensure your fund’s arrangements are properly reviewed and evaluated prior to the deadline.

Safe Harbour 1: The asset acquired is real property

Interest Rate Reserve Bank of Australia Indicator Lending Rates for banks providing standard variable housing loans for investors. Applicable rates:

For the 2015-16 year, the rate is 5.75%

Fixed / variable Interest rate may be variable or fixed
Term of the loan Variable interest rate loan (original) – 15 year maximum loan term (for both residential and commercial)

Variable interest rate loan (re-financing) – maximum loan term is 15 years less the duration(s) of any previous loan(s) relating to the asset (for both residential and commercial)

Loan to Market Value Ratio (LVR) Maximum 70% LVR for both commercial and residential property
Security A registered mortgage over the property is required
Personal guarantee Not required
Nature & frequency of repayments Each repayment is of both principal and interest

Repayments are monthly

Loan agreement A written and executed loan agreement is required

Safe Harbour 2: The asset acquired is a collection of stock exchange listed shares or units

Interest Rate Reserve Bank of Australia Indicator Lending Rates for banks providing standard variable housing loans for investors plus 2%. Applicable rates:

For the 2015-16 year, the interest rate is 5.75% + 2% = 7.75%

Fixed / variable Interest rate may be variable or fixed
Term of loan Variable interest rate loan (original) – 7 year maximum loan term

 

Variable interest rate loan (re-financing) – maximum loan term is 7 years less the duration(s) of any previous loan(s) relating to the collection of assets.

LVR Maximum 50% LVR
Security A registered charge/mortgage or similar security (that provides security for loans for such assets)
Personal guarantee Not required
Nature & frequency of repayments Each repayment is of both principal and interest

Repayments are monthly

Loan agreement A written and executed loan agreement is required

 

Source: Australian Taxation Office, PCG 2016/5, 7 April 2016 https://www.ato.gov.au/law/view.htm?DocID=COG/PCG20165/NAT/ATO/00001

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