The ATO has released Practical Compliance Guidelines PCG 2016/5 Income tax - arm's length terms for Limited Recourse Borrowing Arrangements established by self managed superannuation funds (Guideline) which sets out 2 safe harbours for limited recourse borrowing arrangement (LRBA) loans from related parties to self managed superannuation funds (SMSFs). If such loans comply with the terms of the safe harbours 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 first safe harbour relates to LRBA loans used to acquire real estate. The safe harbour provisions include that:
- the interest rate equal the Bank of Australia Indicator Lending Rates for banks providing standard variable housing loans for investors (currently 5.75%):
- have a term of no more than 15 years (5 years for a fixed interest rate) – variable interest rates reset each 1 July based on the rate in the previous May:
- have a loan to value ratio (LVR) of no more than 70%;
- have monthly payments of interest and principal; and
- be secured against real estate.
The second safe harbour relates to LRBA loans used to acquire listed shares. The safe harbour provisions are similar to the first safe harbour except that the interest rate is an additional 2% (currently 7.75%), the maximum term of the loan is 7 years (3 years for fixed interest) and the LVR is 50%.
Unfortunately, the ATO has not issued a safe harbour for other assets like investments in a regulation 13.22C trust or collectables. Such arrangements will need to be benchmarked.
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