The latest developments affecting LRBA
Since 2007 in certain circumstance Self-Managed Superannuation Funds (SMSF) have been able to borrow money from related parties along with traditional sources such as banks to buy assets. Assets that can be acquired are restricted to a residential property, commercial property or a parcel of shares in the same company.
Little has changed when borrowing money from traditional sources such as banks, however the ATO has put their magnifying glass over LRBA between related parties and released two rulings:
- ATO ID 2015/27; and
- ATO ID 2015/28.
The brass tacks of these rulings surrounded the LRBA terms and whether the SMSF and the related party were dealing at arm’s length, which previously wasn’t a concern in these arrangements. Where a related party LRBA was struck with terms that a third party lender would not accept the ATO has concluded that parties to theses schemes are not dealing at arm’s length and the non-arm’s length income provisions would apply.
The factors the ATO consider when determining whether a LRBA is an arm’s length dealing are as follows:
- Interest rate equal or above the Reserve Bank of Australia Indicator Lending Rates for banks providing standard variable housing loans for investors. The Applicable rate for 2015-2016 year is 5.75%
- Interest rates may be variable or fixed for a period up to five years
- Term of the Loan is a maximum of 5 years
- Loan to Market Value Ratio is below 70%
- A registered mortgage exists over the property
- Loan repayments are monthly and are for both principle and interest
- A written and executed loan agreement exists
If your existing LRBA does not comply with the above requirements there a 4 options one of which must be implemented before 30 June 2016, they are as follows:
- Alter the terms of the loan to meet the conditions listed above.
- Refinance the agreement with the same or other related party with terms that meet conditions listed above.
- Refinance the loan through a bank or other commercial lender.
- Pay out the LRBA and bring the existing LRBA to an end before 30 June 2016.
Due to the regulations surrounding LRBA, care must be taken to ensure arrangements meet with all the conditions of the Superannuation Industry (Supervision) Act 1993. If your SMSF has a LRBA in place and concerned it may not meet all the new requirements please contact our office and speak with one of our advisors.
Furthermore if you are interested in establishing a SMSF and purchasing property or other assets utilising a LRBA please contact our office and speak with one of our advisors.
Please call our office for advise relating to your specific situation.
Mark Carey | Accountant | The Money Edge | Bundaberg