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More ATO guidance for related party limited recourse borrowing arrangements

More ATO guidance for related party limited recourse borrowing arrangements

The ATO has just released more guidance for limited recourse borrowing arrangements (‘LRBAs’). This guidance is in addition to last week’s ATO ID 2014/39 and ATO ID 2014/40 (discussed at

Although this new guidance is ostensibly aimed at ‘non-commercial’ LRBAs, it should also be very relevant when setting the terms of any related party LRBA loan agreement.

The text of the ATO guidance is available at

What the ATO say

Importantly, the ATO confirm that not all related party LRBAs give rise to non-arm’s length income (‘NALI’). This is despite ATO ID 2014/39 and ATO ID 2014/40 where related party LRBAs did result in NALI.

The ATO confirm that in determining whether NALI arises, they are likely to consider:

  • nature of the acquirable asset
  • amount borrowed
  • term of the loan
  • loan-to-value ratio
  • interest rate charged, or the other means by which the lender is compensated for the opportunity cost in lending the principal
  • regularity and frequency of principal repayments required
  • security taken for the borrower’s performance under the loan, given the limited recourse nature of the loan – for example, mortgages and personal guarantees by self-managed superannuation fund members
  • extent to which the loan has operated in accordance with its terms.

The ATO also discuss the importance of benchmarking, stating:

To be able to demonstrate that NALI does not arise, 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.

In short, we now have clarity that the ATO’s position is that related party LRBAs must be benchmarked from the outset and operated in accordance with arm’s length terms on an ongoing basis.

Where more guidance is needed … unit trusts in particular

Naturally, there are certain instances where there is not an easily observable market for lending. One instance is a loan to an SMSF where the SMSF acquires units in unit trust. Most banks are reluctant to lend for this type of asset so it is difficult to be able to simply go to several banks, receive offers in writing and then benchmark.

That being said, even if a bank would not agree to an arrangement, other arm’s length parties might still agree to it. For example, if an SMSF trustee offered a 20+% interest rate and security over all of the units in the unit trust, most arm’s length lenders would jump at this opportunity. Most arm’s length lenders would still jump even if the interest rate were 19% or 18% or 17%. However, presumably no arm’s length lenders would lend for 0% or 1% or 2% interest rates. Therefore, in respect of interest rates, a line needs to be drawn somewhere between, say, 17% and 2%, but it is very difficult to definitively say where. The same can be said in respect of the other factors the ATO mention (listed above).

Hopefully further guidance will follow with more insights in this regard.

Want to change the terms of a related party limited recourse borrowing arrangement?

If you want to change the terms of a related party LRBA or refinance an existing LRBA (eg, move from a related party to a bank or vice versa), DBA Lawyers can help. See and

FSI changes

Naturally, LRBAs face an uncertain future generally. See

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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.

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