Safe Harbour Guidelines for Limited Recourse Borrowing Arrangements

The risk for a self-managed superannuation fund (SMSF) which has entered into a LRBA with a non-bank entity or financial institution is that the ATO will find that the terms of the LRBA is not arm’s length.

This could give rise to an adverse tax consequence for the SMSF – non-arm’s length income (NALI) which is taxed at the highest marginal rate.

On 6 April 2016 the ATO released Safe Harbour Guidelines for LRBAs. The Safe Harbour Guidelines set out key terms for LRBAs established by SMSFs and provides certainty for SMSF trustees and their advisers so that the NALI provisions do not apply.

What type of loan do the Guidelines apply to?

The Safe Harbour Guidelines apply to loans to SMSFs to acquire:

  • Real Property — residential and commercial and
  • Listed Securities.

Key Terms of the Safe Harbour Guidelines

Type of asset Real property (commercial and residential)
Interest rate 5.75% p.a. for the 2015/16 year for both fixed and variable rate loans. Rates can only be fixed for a maximum of 5 years.
Maximum term of loan 15 years.
Maximum loan to market value ration (LVR) 70% LVR
Security A registered mortgage over the property
Personal guarantee Not required
Nature of repayments Principal and interest
Timing of repayments Monthly repayments
Loan agreement A written and executed loan agreement is required

Type of asset Listed shares or units
Interest rate 7.75% p.a. for the 2015/16 year for both fixed and variable rate loans. Rates can only be fixed for a maximum of 3 years.
Maximum term of loan 7 years.
Maximum loan to market value ration (LVR) 50% LVR
Security A registered charge over the shares or units
Personal guarantee Not required
Nature of repayments Principal and interest
Timing of repayments Monthly repayments
Loan agreement A written and executed loan agreement is required

What should you do by 30 June 2016?

If your SMSF clients have non-bank loans with terms that are not within the Safe Harbour Guidelines, you have until 30 June 2016 to act to gain the protection of the Safe Harbour Guidelines. We can assist with the preparation of loan agreements and security documents.

Please call a member of our team if you would like to discuss LRBAs or any other superannuation issue.

For more information contact Meyer Vandenberg:

Christine Murray — Partner — Property, Commercial and Finance
(02) 6279 4402
christine.murray@mvlawyers.com.au

Giang Tan — Associate — Corporate & Commercial
(02) 6279 4425
giang.tan@mvlawyers.com.au