Business News

Quick action required for refinancing LRBAs

SMSFs that need to refinance current limited recourse borrowing arrangements (LRBA) have been urged to do so sooner rather than later as the new ATO practical compliance guidelines (PCG) have immediate effect, regardless of whether the loan was established before their release.

Under PCG 2016/5 “Income tax – Arm’s lengths terms for Limited Recourse Borrowing Arrangements established by self-managed superannuation funds”, an LRBA involving related parties must comply with Reserve Bank of Australia indicator lending rates, cannot exceed a 15-year maximum loan term and must use the 70 per cent loan-to-value ratio (LVR) for real property or 50 per cent LVR for listed shares or units.

It can also use a variable or fixed interest rate, where trustees can fix the rate of the commencement of the arrangement up to a maximum of five years.

Any loans that did not comply with the new safe harbour rules, released earlier this month, would need to alter the terms of the loan to meet the guidelines, which could mean taking out a new loan, NowInfinity principal Grant Abbott said during a webinar.

“When it comes to the term of the loan, the variable interest rate is 15-year maximum loan terms,” Abbott said.

“There is a short time frame for refinancing, either related party or commercially.

“This means we need to start to work pretty quickly.”

Refinancing was available for a maximum loan term of 15 years less the duration of any previous loans, he said.

“So be careful about that – if you are doing a refinancing, it’s 15 years less the duration,” he warned.

“One of the things we’re focusing on there is looking at individual documentation: can we refinance by simply changing the existing loan agreement, or do we take out a new loan agreement, so is it the extinguishment of one loan agreement and a take up of a new one?

“If it’s just simply a refinancing, then effectively we’re going to be stuck with the duration of the prior loan, whereas if it’s a new loan, we’ve got a higher maximum loan term.”

Further, low LVRs meant refinancing by itself would cause major problems for some trustees, unless it was an existing LRBA and asset prices had increased, he said.

Abbott will be presenting a technical session on this topic at the selfmanagedsuper SMSF Strategies Day 2016, commencing in Adelaide on 8 July. For more details, click here.

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital