Practical Compliance Guidelines PCG 2016/5 Income tax - arm's length terms for Limited Recourse Borrowing Arrangements established by self managed superannuation funds (Guideline) sets out further guidance as to how existing non-commercial limited recourse borrowing arrangement (LRBA) loans from related parties to self managed superannuation funds (SMSFs) can be put on commercial terms by 30 June 2016. If such loans are on commercial terms by that date and with effect for the 2015/16 year then the ATO will accept that such loans are on commercial terms and that they will not trigger the application of the non-arm’s length income (NALI) rules. The ATO has said that it will not select an SMSF for a review purely on the basis that it had a loan on a non-commercial basis for previous years.
In order to rectify a non-commercial LRBA loan an SMSF will need, by 30 June 2016, to either:
- Bring the loan terms in line with the safe harbour terms under the Guideline by 30 June 2016 with effect for the entire 2015/16 year (including that interest and principal for the 2015/16 year must be paid); or
- Refinance the loan through a commercial lender (however, the loan must still be put on a commercial basis for the 2015/16 year – including the payment of interest and principal for that year up until the time of the refinance); or
- Repay the LRBA loan (however, again, the loan must still be put on a commercial basis for the 2015/16 year – including the payment of interest and principal for that year up until the time of the repayment).
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