The ATO is set to release new guidance on limited recourse borrowing arrangements (LRBAs) in light of industry lobbying for clearer advice on what constitutes commercial terms.
In November last year, the Superannuation Industry Relationship Network (SIRN) met and discussed the ATO’s compliance approach with respect to existing related-party loans.
The ATO expects SMSFs with an LRBA to have them on commercial terms by 30 June this year, which was made explicitly clear in a statement last December.
This follows two interpretative decisions released in late 2014, which indicate that borrowings on non-commercial terms can cause non-arm’s length income.
Speaking to SMSF Adviser, Peter Burgess, general manager for technical services and education at SuperConcepts, said those who were at the SIRN meeting thought there was still “a lot of confusion” concerning what constitutes commercial terms.
As a result, the ATO agreed to form a separate working group, which would discuss and provide guidance on what should be considered commercial terms.
“That group has had a meeting and so there is some progress being made,” Mr Burgess said.
“You would expect that we will shortly be receiving some guidance from the ATO in terms of certain parameters that constitute commercial terms,” he added.
Mr Burgess said the industry is hopeful to receive guidance on what the benchmark interest rate is that should be used, what the terms of the loan should be, what the maximum loan-to-value ratio should be, whether personal guarantees should just be required, and the frequency of loan repayments.
“There is a bit of urgency given the 30 June deadline, so you’d be hoping we’ll get those guidelines sooner rather than later,” Mr Burgess said.
“For some people they may need to unwind their arrangement, and that may take some time,” he said.
In the meantime, practitioners should “do what they can” to ensure the loan is struck on commercial terms.
“A fund trustee entering into an LRBA with a related-party borrower should obtain and keep documentation that enables them to establish that the terms of the loan, taken together, and the ongoing operation of the loan are consistent with what an arm’s length lender dealing at arm’s length would accept in relation to the particular borrowing by the fund trustee,” Mr Burgess said
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