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Wind-up of complex LRBAs not always viable

Complicated related-party limited recourse borrowing arrangements (LRBA) that require multiple fixes to comply with the ATO’s new practical compliance guideline (PCG) may not necessarily be able to simply wind up the fund as a solution.

“It’s really going to be case-by-case. It’s not always a straight call,” DBA Lawyers director Dan Butler told selfmanagedsuper.

“With quite a number of clients, we’ve been surprised in some circumstances being able to extinguish them.

“It’s really a matter of cash flow and not everyone has cash flow, but if you’ve got the cash flow, it is a bit of a call to attention to say: ‘Do you really want this hassle? Do you just want to get rid of the problem?’”

Butler said there would be clients in that category, but then there would be those that would be stuck.

“For instance, a classic example is where they’ve got a pension and an LRBA and their cash flow is every year, so they’re working out where they get the cash to fund their calls on cash,” he explained.

“With a number of clients, they’re using different options such as simply varying the loan terms and the other is to refinance.

“There are pros and cons of either strategy.”

He also revealed there were many SMSFs he was aware of that were well over the loan-to-value ratio (LVR).

“That’s the hard one because you’ve got to come up with a lot of cash and reduce the loan,” he said.

“The value of the property is locked in so you can’t do much with that.

“That’s where we might be refinancing some people.”

Commenting on whether SMSFs had enough time to make changes to their LRBA by 30 June, he said: “We expect quite a few people won’t make the deadline.

“If you don’t make the deadline, I’d advise you to get an application in to the ATO sooner than later.

“You want to ensure you have done everything realistically to the best of your ability and then alert the ATO that despite best endeavours, you’re not going to make it so you’re giving them the heads-up and will give them an account shortly after 30 June.”

Last week, DBA Lawyers released a free tool for related-party LRBAs, designed for advisers to use to contact their clients about the changes.

“A lot of advisers don’t have the time and patience to do those things so we’re already doing it for our client base and we’re happy to help others do it,” Butler said.

“It is something I think, with the cut and thrust of business, that a lot of advisers or clients may overlook and there’s a lot of work that can be advised with some of these, so if they want to adjust things, there isn’t a lot of time and the downside consequences are quite severe.

“We’re finding that when we document these and they bring them into the safe harbours that there are a few finer points others are unlikely to pick up, so it’s that finer legal detail and the knowledge that we have so we’re playing to our clients.

“There has been quite a lot of demand already.”

Released earlier this month, PCG 2016/5 “Arm’s lengths terms for Limited Recourse Borrowing Arrangements established by self-managed superannuation funds” outlined the specific conditions LRBAs within SMSFs must meet to avoid falling foul of the non-arm’s-length income rules.

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 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.

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