The Tax Office on Wed 6.4.2016, issued Practical Compliance Guideline PCG 2016/5 setting out the Commissioner’s “safe harbour” terms on which SMSF trustees may structure related-party LRBAs consistent with an arm’s length dealing. The ATO generally takes the view that a SMSF may derive non-arm’s length income (taxable at 47%) if the terms of a LRBA are not consistent with an arm’s length dealing: see ATO IDs 2015/27–28. If an LRBA is structured in accordance with PCG 2016/5, the Tax Office accepts that the NALI rules will not apply.
The ATO’s safe harbour terms require an interest rate of 5.75% (for 2015-16) for a related-party LRBA used to acquire real property (residential or commercial). The term of the loan cannot exceed 15 years. A maximum 70% loan-to-value ratio (LVR) applies. Repayments must be made monthly. A registered mortgage is required but personal guarantees are not. Separate safe habour terms apply for listed shares, eg 7.75% interest rate for 2015-16, 7-year loan term maximum and a 50% LVR. The Guideline sets out examples illustrating how SMSF trustees can review and revise the terms of their LRBAs to access the safe harbours.
ATO GRACE PERIOD: The Tax Office has previously announced a grace period whereby it will not select a SMSF for review, provided that arm’s length terms for its LRBA are implemented by 30 June 2016 (or the LRBA is brought to an end before that date). Importantly, PCG 2016/5 requires arm’s length payments of principal and interest to be made for 2015-16 (including where the arrangement is brought to an end). If an LRBA does not meet all of the safe harbour terms, it does not mean that the borrowing is deemed not to be on arms’ length terms. Rather, trustees who do not meet the safe harbour terms will need to otherwise demonstrate that their arrangement was entered into and maintained consistent with arm’s length terms.
DATE OF EFFECT: Applies to LRBAs commenced both before and after today [Wed 6.4.2016].
PCG 2016/5 [LTN 64, 6/4/16]