Safe harbour rate crucial in loan relief

Safe harbour loan relief

SMSFs should not overlook the changes to the safe harbour interest rate when reporting COVID-19 loan relief linked to related party LRBAs.

SMSFs with related-party limited recourse borrowing arrangements (LRBA) taking advantage of the reduction in the safe harbour interest rate for the current financial year will need to reflect that change in any documentation related to COVID-19 loan relief, a technical expert has advised.

Smarter SMSF chief executive Aaron Dunn said the change in the rate, which dropped in July from 5.94 per cent to 5.10 per cent for real property and from 7.94 per cent to 7.10 per cent for listed shares or units, was the first reduction since the 2017 financial year and was important to note in relation to SMSFs that sought LRBA loan relief.

“The most important thing to note from a COVID-19 perspective is that SMSFs that have sought relief, following the Australian Banking Association (ABA) guidelines, will have to reflect, in that calculation and the capitalisation of interest, the change of interest that applied in the initial six months [of relief] and potentially how that applies in the extended four-month period after that,” Dunn said during a recent webinar.

“Make sure you are doing that calculation and preparing a notice to vary that interest rate, year on year, as a lender would ordinarily do and what the terms of the loan facility agreement are expecting to occur.”

He said with the six-month period for loan relief ending in September, lenders were starting to examine the repayments of outstanding loans, and the ATO had indicated SMSFs that had moved outside the real property safe harbour provisions would not have the non-arm’s-length income rules applied to them.

“If the fund has used an outside arrangement to support the terms and conditions, the documentation should reflect if the repayment relief could have been established for a period of six months, similar to what the banks have done, and any period in which relief was provided there would need to be a capitalisation of interest throughout that period,” he said.

He noted that with the six-month period ending, the ABA had released further guidance on extended loan relief that could be used as a guide for SMSFs, with the guidance lasting for another four months.

“What is important here is if there is a clear process and documentation for the fund and the way a loan is structured and if there is an extension of time that is granted that is consistent with what is on the ABA website,” he said.

“The decision to grant extra relief will not be an automatic decision and there will be a need to demonstrate the need for additional time, such as a tenant that is still being impacted by COVID-19 and the fund is still providing rent relief to them.”

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