SMSFs with related party LRBA borrowings

On Monday 10 November 2015, Daniel Butler, in his role as the chair of The Tax Institute’s National Superannuation Committee, attended a meeting of the Superannuation Industry Relationship Network (‘SIRN’) with representatives of the ATO and a range of industry stakeholders.

ATO amnesty on non-commercial LRBAs

At this meeting, the ATO confirmed that there is a need for SMSFs with non-commercial related party LRBAs to put these on arm’s length terms as soon as possible and by 1 July 2016 at the latest.

For example, if an SMSF has a nil interest borrowing from a related party, the ATO expects the SMSF to benchmark the borrowing with an arm’s length LRBA and ensure there is sufficient and appropriate evidence to support the terms of the arrangement being fully reflective of arm’s length terms and that these terms are being complied with on an ongoing basis.

The ATO are working on issuing a public statement to clarify the terms of this amnesty soon and in the meantime the ATO is urging SMSFs to get any non-commercial LRBAs adjusted as soon as practicable in line with benchmark evidence.

While the ATO is not dedicating active resources to ensure compliance with arm’s length terms until 1 July 2016, if the ATO come across an SMSF with a non-commercial LRBA via their usual activity in the meantime, then the ATO will apply the non-arm’s length income tax rate of 47% in accordance with s 295-550 of the Income Tax Assessment Act 1997 (Cth).

DBA Lawyers, in addition to its usual LRBA offering, offers a service of altering the terms of an existing LRBA borrowing and also prepares documents to refinance an existing LRBA borrowing. We also provide legal advice, technical support and documentation on all related SMSF matters.

Conclusions and action items

SMSF trustees with non-commercial LRBAs should ensure they have ample arm’s length evidence to ensure they can support the terms of their arrangements. Moreover, SMSFs should ensure that these terms are continually monitored to ensure they are complied with. For example, any delay or default in payment should be followed up promptly and appropriate action taken.

Care is needed when varying the provisions given the range of ‘related’ documents that are involved with an LRB arrangement.

Further training and reading

DBA Lawyers has prepared a comprehensive training course which covers LRBAs. This course is prepared and presented by Australia’s most experienced SMSF lawyers.

Also, please refer to the following for further reading:

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.