SMSFs with limited recourse borrowing arrangements (LRBA) where the lender is a related party can seek loan repayment relief during the COVID-19 pandemic without being in breach of non-arm’s-length income (NALI) rules, an SMSF technical expert has said.
Heffron SMSF technical and education services director Leigh Mansell said related-party lenders could offer LRBA loan repayment relief as long as the trustee was able to demonstrate the relief was provided on similar terms to the relief provided by commercial lenders to funds or commercial landlords in similar circumstances.
“[What the ATO has said] is you’re not going to have NALI [breaches] if the trustee is able to demonstrate that the loan repayment relief was in line with what a commercial lender would actually offer to the fund – same asset, same terms and conditions on loan relief – or you can benchmark your repayment relief to the Australian Banking Association’s (ABA) commercial loan relief criteria,” Mansell said during a Heffron webinar last week.
“If you have a look at [the ABA’s criteria] to see what commercial banks are offering to people who have borrowed money, there are things like deferring loan repayments for up to six months [and] capitalising interest.
“So you can also have loan repayment relief when you are dealing with LRBAs. Even if you’ve got a related-party lender, it will be fine as long as you’re benchmarking the relief to what the commercial situation [is].”
Pointing to recent ATO guidance, she noted the regulator would expect the interest on any deferred loans to be accrued and repaid in order to ensure the deferral could not be seen as a waiver of the interest. Trustees would need to revert back to principal and interest repayments as soon as possible, she added.
She also emphasised the importance of having the appropriate documentation in place for the eventual audit of the fund.
“You would [need] to have a letter from the fund to the lender requesting loan repayment relief so it would be the fund asking for the relief [and] you would [need] to have on file a document that outlines the agreed relief that the lender is going to give to the fund,” she said.
“You would [also benefit from] having trustee minutes that confirm this is the relief [the fund] has been granted, this is what [the trustees] are going to do, and document the fact that, at some point in time, the principal and interest repayments will need to [start up] again moving forward.”
Last month, Townsends Business & Corporate Lawyers superannuation online services managing solicitor Jeff Song said trustees thinking of selling units in a unit trust subject to an existing LRBA as a result of the coronavirus pandemic must factor in the usual SMSF compliance issues.
