Providing a complete repayment schedule for a related-party loan granted to an SMSF is a requirement fund auditors will insist on to ensure a borrowing is compliant with the limited recourse borrowing arrangement (LRBA) safe harbour rules laid out in Practical Compliance Guideline (PCG) 2016/5, a specialist practitioner has said.
To this end, Seamless SMSF specialist auditor and adviser Frank La Spada reminded accountants and advisers one of the conditions of PCG 2016/5 is a related-party loan used to acquire a property must be repaid within a 15-year period.
“When we are reviewing the fund, we want to be actually able to identify that the loan that has been put in place is [capable of being] fulfilled and paid off over that 15-year timeframe. So what might happen is a lot of the time we will go to our clients and say ‘can you provide the repayment schedule for the entirety of the loan’,” La Spada told attendees of a technical webinar Accurium recently hosted.
“’The reason why I want that is because I want to see what you have done to work out what the monthly repayment is.’”
Further, he pointed out providing details of the repayments over one year will constitute insufficient audit evidence.
“Those numbers are meaningless unless I know that they’ve been used with some type of rationale or formula that is going to allow the loan to be paid off within the [required] timeframe.”
According to La Spada, this is an area where the servicing of SMSF clients is often inadequate and can lead to severe adverse consequences for trustees.
“A lot of the time firms may not have that schedule put in place and it’s really just been left to the trustees to work out what repayments they feel like making or what payment they think they should make or they haven’t really taken that extra step in really planning things out,” he explained.
“Unfortunately, in some of those cases the safe harbour guidelines might not be met and it could be considered a non-arm’s-length arrangement. It just creates an array of problems that could quite easily be avoided when that loan was initially set up.”
