Sladen Snippet – non-commercial LRBA loans must be rectified with effect from 1 July 2015

In our previous Sladen Snippet, we confirmed that the Australian Taxation Office (ATO) will not take active steps to review non-commercial limited recourse borrowing arrangement (LRBA) loans prior to 30 June 2016, but that such LRBA loans should be put on arm’s length terms by 30 June 2016. If that occurs then the ATO has stated that it will not actively review such non-commercial LRBAs in prior years.

The ATO has now made an important clarification to this concession. The rectification must not only involve putting the loan on commercial terms by 30 June 2016, but also that it is on commercial terms for the whole of the 2015/16 year. This could mean that by 30 June 2016 the self managed superannuation fund (SMSF) trustee may have to top up its interest payments for the year, repay a year’s worth of principal and reduce the loan’s loan to value ratio (LVR).

We expect further clarification of this from the ATO in the coming weeks, as well as more information about the proposed safe harbours for what will be deemed to be a commercial arrangement.

SMSF trustees with non-commercial loans in place should start reviewing their arrangements now to ensure they can put them on commercial terms and assess how they may fund any necessary payments of principal and interest for the 2015/16 year.

To discuss this further or for more information, please contact:

Phil Broderick
03 9611 0163