Borrowing (alter terms of related party loan)

Why change the terms of a related party loan?

Where an SMSF trustee has borrowed from a related party (non-bank lender) in accordance with an LRBA, the loan must be on arm’s length terms otherwise the ATO will view any income and capital gain derived in connection with the LRBA as non-arm’s length income and this will be taxed at the highest marginal tax rate (plus any applicable levies).

The ATO has released Practical Compliance Guideline (PCG) 2016/5, which sets out ‘safe harbour guidelines’ that effectively provide a standardised set of loan terms that in the ATO’s view equates to arm’s length terms for real property, listed shares and listed units. LRBAs that are structured in accordance with these guidelines will generally be taken to be consistent with an arm’s length dealing and the non-arm’s length income provisions should not apply purely because of the terms of the borrowing arrangement. Naturally expert advice should be obtained to ensure any proposed LRBA is fully compliant.

Those who are concerned their related party loan is not on arm’s length terms might consider changing the terms to replicate the safe harbour guidelines or to ensure that the parties are in the same position they would have been in had they dealt at arm’s length.

DBA Lawyers can assist with altering the terms of a related party loan. We can also provide advice and assistance at our hourly fee rates.

What’s included

• Covering letter
• Trustee resolutions
• Deed of variation of loan agreement
• SMSF Borrowing Memo

Please note that mortgage, charge or security documents are not included in the document suite. These are usually prepared by the lawyer handling the client’s property work. We can provide a referral, if needed.

Related articles:

• For a range of articles please click here.