Safe Harbour
Guidelines for Related Party Borrowings
The ATO has released a practical compliance guideline (PCG)
for 2016/15 relating to the ‘safe harbour’ terms on which SMSF trustees may
structure their Limited Recourse Borrowing Arrangements (LRBAs). For income tax
compliance purposes the Commissioner accepts that an LRBA structured in
accordance with this Guideline is consistent with an arm’s length dealing and
that the NALI provisions do not apply purely because of the terms of the
borrowing arrangement.
Safe Harbour 1: The asset
acquired is real property
Safe Harbour 1 applies when an SMSF uses an LRBA to acquire
real property or to refinance a borrowing used to acquire real property,
whether that property is residential or commercial premises (including property
used for primary production activities).
The ATO accepts that an LRBA used to acquire real property,
or to refinance a borrowing used to acquire real property is consistent with an
arm’s length dealing if the terms of the borrowing are established and
maintained throughout the LRBA as set out below.
Interest Rate
|
RBA Indicator Rates for banks providing standard variable housing
loans for investors
(5.80% for the 2017-2018 year)
|
Fixed/Variable
|
Interest rate may be variable or fixed
·
Variable – uses the applicable rate (above)
for each year of the LRBA
·
Fixed – trustees may choose to fix the rate at
the commencement of the arrangement for a specified period, up to a maximum
of 5 years
The 2017-18 rate of 5.80% may be used for LRBAs in existence on
publication of these guidelines, if the total period for which the interest
rate is fixed does not exceed 5 years.
For the 2017-18 and later years, the rate published for May (the rate for the month of May immediately prior to the start of the relevant financial year).
|
Term of 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)
Fixed interest rate loan – a new LRBA commencing after publication of
these guidelines may involve a loan with a fixed interest rate set at the beginning
of the arrangement. The rate may be fixed for a maximum period of 5 years and
must convert to a variable interest rate loan at the end of the nominated
period. The total loan term cannot exceed 15 years.
For an LRBA in existence on publication of these guidelines may
involve a loan with a fixed interest rate set at the beginning of the
arrangement. The rate may be fixed for a maximum period of 5 years and must
convert to a variable interest rate loan at the end of the nominated period.
The total loan term cannot exceed 15 years.
For an LRBA in existence on publication of these guidelines, the
trustees may adopt the rate of 5.75% as their fixed rate, provided that the
total fixed-rate period does not exceed 5 years. The interest rate must
convert to a variable interest rate loan at the end of the nominated period.
The total loan cannot exceed 15 years.
|
Loan to Market Value Ratio
|
Maximum 70% LVR for both commercial and residential property
If more than one loan is taken out to acquire (or refinance) the
asset, the total amount of all those loans must not exceed 70% LVR.
The market value of the asset is to be established when the loan
(original or re-financing) is entered into.
For an LRBA in existence on publication of these guidelines, the trustees may use the market value of the asset at 1 July 2015. |
Security
|
A registered mortgage over the property is required
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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
Safe Harbour 2 applies when an SMSF uses an LRBA to acquire a
collection of shares in a stock exchange listed company or to acquire units in
a stock exchange listed unit trust. Safe Harbour 2 also applies when an SMSF
uses an LRBA to refinance a borrowing used to acquire such a collection.
The ATO accepts that an LRBA used to acquire or to refinance
a borrowing used to acquire stock exchange listed shares or stock exchange
listed units in a unit trust is consistent with an arm’s length dealing if the
terms of the borrowing are established and maintained throughout the LRBA, as
set out below.
Interest Rate
|
Reserve Bank of Australia Indicator Lending Rates for banks providing
standard variable housing loans for investors plus 2%.
(2017-18 year = 5.80% + 2% = 7.80%)
|
Fixed / variable
|
Interest rate may be variable or fixed
·
Variable – uses the applicable rate (as set
out above) for each year of the LRBA
·
Fixed – trustees may choose to fix the rate at
the commencement of the arrangement for a specified period, up to a maximum
of 3 years. The fixed rate is the rate for May plus 2% (the rate for the May
before the relevant financial year)
The 2017-18 rate of 7.80% may be used for LRBAs in existence on
publication of these guidelines, if the total period for which the interest
rate is fixed does not exceed 3 years.
|
Term of loan
|
Variable interest rate loan (original) – 7 year maximum loan term
Variable interest rate loan (re-financing0 – maximum loan term is 7
years less the duration(s) of any previous loan(s) relating to the collection
of assets
Fixed interest rate loan – a new LRBA commencing after publication of
these guidelines may involve a loan that has a fixed interest rate set at the
beginning of the arrangement. The rate may be fixed up to for a maximum of 3
years, and must convert to a variable interest rate loan at the end of the
nominated period. The total loan term cannot exceed 7 years.
For an LRBA in existence on publication of these guidelines, the
trustees may adopt the rate of 7.75% as their fixed rate, provided that the
total period of the fixed rate does not exceed 3 years. The interest rate
must convert to a variable interest rate loan at the end of the nominated
period. The total loan cannot exceed 7 years.
|
LVR
|
Maximum 50% LVR
If more than one loan is taken out to acquire (or refinance) the
collection of assets, the total amount of all those loans must not exceed 50%
LVR.
The market value of the collection of assets is to be established
when the loan (original or re-financing) is entered into.
For an LRBA in existence on publication of these guidelines, the
trustees may use the market value of the asset at 1 July 2015.
|
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
|
ATO’s compliance approach for LRBAs established before 30 June 2016
The ATO recognises the effects of the NALI provisions and
the importance of preserving assets held by an SMSF. Given this, they will not
select an SMSF for an income tax review for the 2014-15 year or earlier years
purely because the SMSF has entered into an LRBA. However, this is conditional
on the SMSF trustee ensuring that any LRBA that their fund has is on terms
consistent with an arm’s length dealing by 31 January 2017 or, alternatively,
is brought to an end by 31 January 2017.
In addition, payments of
principal and interest must be made under LRBA terms consistent with an arm’s
length dealing. SMSF trustees who are concerned about their ability to make the
required payments on commercial terms before 31 January 2017 can contact the
ATO to discuss their particular circumstances.
