
The ATO has released new LRBA guidance. What does it mean for me?
One of the major issues with LRBAs has been around the terms of loans from related parties.
In December 2014, the ATO confirmed that in its view, all loans by related parties to trustees of SMSFs must be on terms that are consistent with an arm’s length dealing (see ATO IDs 2014/39 and 2014/40). If the loan terms were not, then the income from the LRBA is non-arm’s length income to the SMSF and taxed at the top marginal tax rate in the SMSF (instead of the normal rate of 15 per cent, or no tax for income from assets supporting an income stream or pension).
This meant that the trustees of SMSFs who had borrowed from a related party must review the terms of their loan arrangements to ensure they on the same terms as what an arm’s length lender would require.
The ATO provided an effective deadline of 30 June 2016 for trustees of SMSFs to get their loan arrangements in order.
To provide certainty around what the ATO considers arm’s length terms, in April 2016 the ATO released PCG 2016/5. It contains safe harbour terms that the ATO will accept are arm’s length, so if followed, the income from the LRBA will not be considered non-arm’s length income to the SMSF purely because of the terms of the borrowing.
What are the safe harbour rules?
This is a summary of the key safe harbour rules:
When must the LRBA comply by?
The safe harbour rules apply both to existing LRBAs and those established after the release of PCG 2016/5.
In PCG 2016/5, the ATO confirms it will not select an SMSF for an income tax review for the 2014-15 or earlier years purely because the SMSF has entered into an LRBA if by 30 June 2016:
• all loans are on terms consistent with an arm’s length dealing, or the LRBA is wound up; and
• the SMSF trustee has made principal and interest payments for the 2015-16 year that are consistent with an arm’s length dealing.
Are there other options?
The ATO accepts that alternative loan terms can be consistent with an arm’s length dealing, but the onus will be on the trustees of the SMSF to establish they are consistent with an arm’s length dealing.
This means the options for trustees of SMSFs with LRBAs that have loans from related parties are to:
1. ensure the terms of the related party loan comply with the safe harbour rules by 30 June 2016 (including making principal and interest payments for the 2015-16 year consistent with an arm’s length dealing);
2. wind up the LRBA by 30 June 2016 (for example, by selling the asset or paying out the debt and transferring it to the SMSF), having made principal and interest payments for the 2015-16 year consistent with an arm’s length dealing; or
3. ensure they have extrinsic evidence that the terms of the existing arrangement are consistent with an arm’s length dealing (for example, because they are substantially the same as an offer of finance from a bank).
Is it just the loan terms to worry about?
The terms of the loan are an important part of an LRBA, but there are many other rules that are just as important. A breach of any of the rules can result in compliance issues for the SMSF or for the income from the LRBA to be non-arm’s length income to the SMSF (and taxed at the top marginal tax rate).
Now is a good opportunity for trustees of SMSFs to review their LRBAs, particularly where the lender is a related party, not only for the loan terms, but also for compliance with all the other rules as well.
Scott Hay-Bartlem, partner, Cooper Grace Ward

Tax saving
How are Australians planning on spending their tax savings?
Essential bills, savings accounts, Christmas gifts and exchange-traded funds appear to be the big winners from the latest round of tax cuts, new research has revealed. ...Read more

Tax saving
First in the world: SA imposes EV tax
The South Australian government is the first government in the world to introduce an electronic vehicles tax following an announcement by the treasury. ...Read more

Tax saving
5 tips as tax deadline looms
Australians are being warned that they have just two weeks left to get their finances in order if they have not posted a tax return yet. ...Read more

Tax saving
ATO warns businesses of JobKeeper scam
The ATO is warning the community about a JobKeeper scam which is asking members to enter personal information. ...Read more

Tax saving
Why fast-tracking tax cuts won’t stimulate the economy
Treasurer Josh Frydenberg has flagged that previously legislated tax cuts could be moved forward in a bid to help stimulate the Australian economy. ...Read more

Tax saving
Last-minute items to check off before 30 June
With the end of the financial year almost here, an accounting firm has outlined key changes with tax returns this year and flagged some last-minute tax strategies to consider before 30 June. ...Read more

Tax saving
Australia’s richest owe the Tax Office $772m
Australia’s elites and private companies fell $772 million in taxes due to miscalculations and deliberate tax avoidance, the Australian Taxation Office has revealed. ...Read more

Tax saving
Do you have to pay taxes on a trust?
Trusts are usually set up for business, estate planning and investment purposes to separate the legal and beneficial ownership of assets held within the structure. ...Read more

Tax saving
How are Australians planning on spending their tax savings?
Essential bills, savings accounts, Christmas gifts and exchange-traded funds appear to be the big winners from the latest round of tax cuts, new research has revealed. ...Read more

Tax saving
First in the world: SA imposes EV tax
The South Australian government is the first government in the world to introduce an electronic vehicles tax following an announcement by the treasury. ...Read more

Tax saving
5 tips as tax deadline looms
Australians are being warned that they have just two weeks left to get their finances in order if they have not posted a tax return yet. ...Read more

Tax saving
ATO warns businesses of JobKeeper scam
The ATO is warning the community about a JobKeeper scam which is asking members to enter personal information. ...Read more

Tax saving
Why fast-tracking tax cuts won’t stimulate the economy
Treasurer Josh Frydenberg has flagged that previously legislated tax cuts could be moved forward in a bid to help stimulate the Australian economy. ...Read more

Tax saving
Last-minute items to check off before 30 June
With the end of the financial year almost here, an accounting firm has outlined key changes with tax returns this year and flagged some last-minute tax strategies to consider before 30 June. ...Read more

Tax saving
Australia’s richest owe the Tax Office $772m
Australia’s elites and private companies fell $772 million in taxes due to miscalculations and deliberate tax avoidance, the Australian Taxation Office has revealed. ...Read more

Tax saving
Do you have to pay taxes on a trust?
Trusts are usually set up for business, estate planning and investment purposes to separate the legal and beneficial ownership of assets held within the structure. ...Read more