Urgent LRBA action required

Image of a runner trying to keep up.

Time is almost up for clients' non-bank LRBAs to be compliant with PCG 2016/5.

A specialist superannuation law firm has urged financial advisers to review the situation of their SMSF clients who have a non-bank limited recourse borrowing arrangement (LRBA) before the 31 January deadline.

Cooper Grace Ward partners Scott Hay-Bartlem and Clinton Jackson have issued the warning, emphasising all non-bank LRBAs must exist on arm’s-length terms before time runs out.

“If you have not yet reviewed or updated your clients’ related-party loans to ensure they comply with [practical compliance guideline] PCG 2016/5, you should take urgent action to ensure the non-arm’s-length income rules will not apply to the SMSFs because of the loan terms,” Jackson said.

“It’s also a good opportunity to review the other parts of the LRBAs to make sure there are no other compliance issues.

“We have seen many LRBAs with related-party loans that do not comply with the rules for other reasons.”

There are several actions to follow in order for a non-bank LRBA within an SMSF to escape non-arm’s-length income treatment for taxation purposes.

One is to comply with the safe harbour guidelines issued by the ATO in PCG 2016/5.

A second is to ensure the loan in question has been issued by an arm’s-length lender and a third is for the LRBA to be supported by a registered mortgage or security over the acquired asset.

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