SMSF advisers and trustees need to be aware the ATO’s practical compliance guidelines (PCG) issued last week regarding limited recourse borrowing arrangements (LRBA) do not cover all assets or all aspects of these types of gearing strategies, according to some sector experts.
SMSF Design chief executive Tracey Besters pointed out the safe harbour circumstances outlined in PCG 2016/5 “Income tax – Arm’s length terms for Limited Recourse Borrowing Arrangements established by self-managed superannuation funds” did not take into account some LRBA items that also had non-arm’s-length income (NALI) implications.
“The safe harbour does not cover any other element of the property securities transaction, such as whether the asset was acquired at market value, and therefore the commissioner may still consider NALI outside of the guidelines,” Besters explained.
“The safe harbour provisions are also only dealing with real property and listed securities, so do not cover unlisted securities.”
Townsends Business and Corporate Lawyers special counsel Michael Hallinan identified another area PCG 2016/5 did not cover.
“No guidance, practical or otherwise, has been provided for private unit trust LRBAs,” Hallinan said.
“Further, the guidance provided is not as comfortable or as accommodating as one would have hoped from a safe harbour.
“In particular, the maximum LVRs (loan-to-value ratios), maximum duration and minimum interest rates are not comfortable.”
However, some additional positive elements were identified as well, including the ATO’s approach towards compliance in the area.
“The ATO has stated that it understands the importance of preserving assets held by an SMSF and the effects of the NALI provisions,” Besters said.
“So they will not select an SMSF for review for the 2014/15 year or earlier purely because the SMSF has entered into an LRBA.”
Regardless of the regulator’s attitude mentioned above, Besters still advised advisers and trustees to revise all LRBAs in place with a view to altering the terms of the loan to satisfy the guidelines, refinancing the loan through a commercial lender or paying out the LRBA.
Townsends highlighted another positive in that there were no more policy arguments for the banning of LRBAs when PCG 2016/5 was examined in conjunction with revised ATO interpretive decision ID 2015/27 and ID 2015/28.