Wednesday 13 April 2016

The Australian Taxation Office (ATO) has released Practical Compliance Guideline 2016/5 to assist trustees of self-managed superannuation funds (SMSFs) in structuring limited recourse borrowing arrangements (LRBAs), where the borrowing is provided by a related party.

Where an LRBA with a related party lender is established and the loan is not on commercial terms, the ATO may classify the income from the arrangement as non-arm’s length income, which is subject to tax at the highest marginal rate. The Guideline sets out the terms on which SMSF trustees may structure their LRBAs so that the ATO will accept the LRBA as being an arm’s length dealing.

The table shows the borrowing terms the ATO considers are consistent with an arm’s length dealing:

Loan feature
Real property (residential or commercial)
Shares/units listed on a stock exchange
Interest rate benchmark
Reserve Bank Indicator Lending Rates for banks providing standard variable housing loans for investors, plus 2% for loans relating to shares/units
Interest rate 2015/16: 5.75% 2016/17 and later years: the rate for the May immediately prior to the financial year end 2015/16: 7.75% 2016/17 an later years: the rate for the May immediately prior to the financial year end + 2%
Repayment type Variable or fixed. Maximum five years for fixed rate terms Variable or fixed. Maximum three years for fixed rate terms
Loan term Maximum of 15 years Maximum of 7 years
Loan to value ratio 70% 50%
Security Registered mortgage over property Registered charge/mortgage or similar security
Personal guarantee Not required Not required
Repayment frequency Monthly. Must be principal and interest Monthly. Must be principal and interest
Loan agreement Written and executed Written and executed

The Guideline states that the ATO will not select an SMSF for a tax review for the 2014/15 year solely because of an LRBA arrangement. However, this is conditional on SMSF trustees either ensuring the LRBA terms are consistent with the Guideline or bringing the LRBA to an end by 30 June 2016. Additionally, payments of principal and interest for the 2015/16 financial year must be made under LRBA terms consistent with an arm’s length dealing.

Note that trustees may enter into an LRBA that is inconsistent with the Guidelines, but they must demonstrate that the arrangement was entered into and maintained on terms consistent with an arm’s length dealing. This may be by replicating the terms of a commercial loan that is available in the same circumstances.

Further information

ATO PCG 2016/5, Income tax: arm’s length terms for Limited Recourse Borrowing Arrangement established by self-managed superannuation funds, 6 April 2016

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Any information on this page in relation to mortgages has been prepared by Macquarie Securitisation Limited (MSL) Australian Credit Licence (ACL) 237863 ACN 003 297 336.

Unless stated otherwise, this information has been prepared by Macquarie Bank Limited ABN 46 008 583 542 AFSL and Australian Credit Licence 237502.

This information is provided for the use of licensed and accredited brokers and financial advisers only. In no circumstances is it to be used by a potential client for the purposes of making a decision about a financial product or class of products.