Safe Harbour Rules for SMSFs with Related Party LRBAs

Safe Harbour Rules for SMSFs with Related Party LRBAs

Safe Harbour Rules for SMSF with Limited Recourse Borrowing Arrangement

If you have a Self-Managed Superannuation Fund with Limited Recourse Borrowing Arrangements (LRBAs) with a related party , the ATO has released guidelines in relation to establishing acceptable terms of the borrowings. These guidelines are referred to as the Safe Harbour Rules and they are set out in PCG 2016/5 which was released on 7 April 2016.  Trustees were previously advised that they have until 30 June 2016 to ensure compliance, however the ATO have extended this deadline to the 31st January 2017.  Making sure that your LRBA terms are compliant is important, as a breach of these rules could mean that the income from the assets to which there is a LRBA in place would be deemed Non Arms-Length Income and could potentially be taxed at the highest marginal tax rate.

Safe Harbour 1: Real Property Asset

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Interest RateReserve Bank of Australia Indicator Lending Rates for banks providing standard variable housing loans for investors. Applicable rates:
For the 2015-16 year, the rate is 5.75%
Fixed / variableInterest rate may be variable or fixed
Term of the loanVariable 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.
Loan to Market Value Ratio (LVR)Maximum 70% LVR for both commercial and residential property
SecurityA registered mortgage over the property is required
Personal guaranteeNot required
Nature & frequency of repaymentsEach repayment is of both principal and interest
Repayments are monthly
Loan agreementA written and executed loan agreement is required

Safe Harbour 2: Collection of Stock Exchange Listed Shares or Units

Interest RateReserve Bank of Australia Indicator Lending Rates for banks providing standard variable housing loans for investors plus 2%. Applicable rates:
For the 2015-16 year, the interest rate is 7.75%
Fixed / variableInterest rate may be variable or fixed
Term of loanVariable interest rate loan (original) – 7 year maximum loan term
Variable interest rate loan (re-financing) - 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.
LVRMaximum 50% LVR
SecurityA registered charge/mortgage or similar security (that provides security for loans for such assets)
Personal guaranteeNot required
Nature & frequency of repaymentsEach repayment is of both principal and interest
Repayments are monthly
Loan agreementA written and executed loan agreement is required

 

Contributed by: Helene Kosasie[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]

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