ATO, Tax

Loan deferrals need safe harbour clarity

loans deferrals safe harbour

Further guidance from the ATO is required to indicate how the related-party loan safe harbour rules can potentially be amended for COVID-19 loan deferrals.

A technical expert has called on the ATO to provide guidance as to how circumstances associated with deferral of payments granted for a related-party loan as a COVID-19 economic relief measure will be treated with regard to the safe harbour rules outlined in Practice Compliance Guideline 2016/5.

During the latest Accurium technical webinar, specialist adviser Mark Ellem identified a concerning issue regarding safe harbour related-party loan repayment terms that have arisen out of the coronavirus economic relief instruments that requires addressing to give SMSF trustees comfort non-arm’s-length income (NALI) penalties will not be triggered.

“[If a repayment deferral is given] can we extend the term of the loan? We know if we’re using safe harbour, and the asset under the LRBA (limited recourse borrowing arrangement) is a property, then the maximum term of the loan is 15 years,” Ellem said.

“So would we be able to increase the term of the loan, where there has been a deferral, and still be in accordance with the safe harbour rules?”

To eliminate the ambiguity of the situation outlined above, and the concerns SMSF trustees might have of breaching the safe habour rules resulting in a NALI event, Ellem called on the ATO to provide further guidance as to what the catch-up repayment period should be subsequent to any deferral of a loan settlement.

To this end, he suggested some common sense steps the regulator could implement to address these unique circumstances.

“With those safe harbours what I’d like to see is, [and what] would be welcome further relief, is the ability to extend the maximum term of the loan by a period of the loan relief,” he said.

“So if we’ve got loan relief for six months, let’s [be allowed to] tack six months onto the end of the term. So if it was a 15-year term loan, and that’s the maximum under safe harbour, we can take it out to 15 years and six months.”

Other calls have been made to have the term ‘as soon as possible’ properly defined with regard to the catch-up payments for related-party loan deferrals.

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