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Related-party LRBA benchmarks may turn costly

SMSFs with related-party limited recourse borrowing arrangements (LRBA) could face further administrative expenses and will require more time and effort if standardised benchmarking across all types of transactions becomes an expectation of the regulator.

The ATO’s Practical Compliance Guideline (PCG) 2016/5, released last year, stipulated the safe harbour conditions for related-party LRBAs, however, only covered listed shares and real property.

Assets outside these categories via an LRBA, such as investments in unlisted entities, will need to use and apply benchmarking to demonstrate it is within an arm’s-length deal.

“My concern is that this could be the thin edge of the wedge,” Sladen Legal principal Phil Broderick told the Self-managed Independent Superannuation Funds Association SMSF Forum in Melbourne last week.

“At the moment, the ATO’s view has been restrictive in relation to the obligation to benchmark related-party LRBAs, but there are a lot of related-party transactions with SMSFs that potentially can be caught.

“So is that going to mean that all these arrangements are going to have to be benchmarked eventually – related-party contracts and related-party leases, et cetera?”

Broderick warned this will likely result in additional administrative costs and expenses, as well as require more time and effort from trustees.

“Some people would say if you’re going down these related-party transactions, that’s part of the deal,” he said.

“But it certainly means it’s penalising those who are otherwise trying to do the right thing within the ballpark [of the safe harbour guidelines] without the unnecessary expenses and time administration of trying to find benchmarking material.”

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