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ATO Introduces 'Safe Harbour Terms' for SMSF's Limited Recourse Borrowing Arrangements
24th August 2016
The ATO has recently released a Guideline which creates ‘Safe Harbour’ terms from the non-arm’s length income (NALI) provisions for SMSFs acquiring an asset under a limited recourse borrowing arrangement (‘LRBA’). In short, a LRBA which does not comply with the ‘Safe Harbour’ terms could be deemed not to be on arms’ length terms which could result in the SMSF’s income from that arrangement being taxed at top marginal rates instead of usual super fund tax rates.
The Guideline outlines two safe harbours, one for LRBAs used to acquire real property or to refinance a loan used to acquire real property and one for LRBAs used to acquire a collection of shares in a stock exchange listed company or units in a stock exchange listed unit trust (including where an SMSF uses an LRBA to refinance a loan used to acquire such collection).
The ATO acknowledges that an LRBA will be considered an arm’s length dealing and the NALI provisions will not apply if the terms of the LRBA are established and maintained as set out below.
| Asset | Real Property | Stock Exchange Listed Shares or Units |
|
Interest Rate |
Reserve Bank of Australia Indicator Lending Rates for banks providing standard variable housing loans for investors. Applicable rates: - for the 2015-2016 financial year, the rate is 5.75%; - for the 2016-2017 financial year and later years, the rate for the month of May immediately prior to the start of the relevant financial year. |
Reserve Bank of Australia Indicator Lending Rates for banks providing standard variable housing loans for investors plus 2%. Applicable rates: - for the 2015-2016 financial year, the rate is 7.75%; - for the 2016-2017 financial year and later years, the rate for the month of May immediately prior to the start of the relevant financial year. |
|
Fixed/Variable |
Interest rate may be variable or fixed. If the interest rate is variable, the applicable rate as set out above for each year of the LRBA must be used. The interest rate may be fixed at the commencement of the LRBA for a period up to a maximum period of 5 years. The rate must be the rate published for the May before the relevant financial year. After 5 years, the loan must convert to a variable interest rate loan. |
Interest rate may be variable or fixed. If the interest rate is variable, the applicable rate as set out above for each year of the LRBA must be used. The interest rate may be fixed at the commencement of the LRBA for a period up to a maximum period of 3 years. The rate must be the rate published for the May before the relevant financial year plus 2%. After 3 years, the loan must convert to a variable interest rate loan |
|
Term of the loan |
For an original loan, the maximum loan term is 15 years. The Maximum term for a re-financing is 15 years less the duration of any previous loan(s). |
For an original loan, the maximum loan term is 7 years. The Maximum term for a re-financing is 7 years less the duration of any previous loan(s). |
|
Maximum Loan to Market Value Ratio |
70% of the market value of the asset when the loan (original or re-financed) is entered into. |
50% of the market value of the asset when the loan (original or re-financed) is entered into. |
|
Security |
A registered mortgage over the property is required. |
A registered charge/mortgage or similar security is required. |
|
Personal Guarantee |
Not required. |
Not required. |
|
Nature and Frequency of Repayments |
Monthly on a principal and interest basis. |
Monthly on a principal and interest basis. |
|
Loan Agreement |
A written and executed loan agreement is required. |
A written and executed loan agreement is required. |
Originally, the date for compliance with the above was 30 June 2016 however the ATO has allowed an extension until 31 January 2017 for trustees of self managed superannuation funds to ensure that LRBAs are either amended to conform with the safe harbour requirements or are brought to an end.
However, it is important to note that payments of principal and interest for the financial year ended 30 June must be made in accordance with the safe harbour provisions by 31 January 2017.
For further information or assistance with the NALI provisions, please contact Renze Verheyen of our office.
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