An SMSF legal specialist has emphasised SMSFs that continue to use related-party limited recourse borrowing arrangements (LRBA) should be vigilant in making principal and interest payments to ensure they do not breach the non-arm’s-length income (NALI) provisions.
DBA Lawyers director Dan Butler said financial pressures may lead to failure to maintain payment schedules and SMSF practitioners needed to prompt compliance from their clients.
“Practical Compliance Guide (PCG) 2016/5 is very important if you are doing a related-party LRBA,” Butler said during a webinar presented by the legal firm late last week.
“Be very mindful there will be no banks pushing at your clients if they are not paying their monthly principal and interest amounts [under a related-party LRBA], and in these times a lot of people are falling behind.
“Make sure they are keeping on the straight and narrow with their LRBA, particularly where a related party is involved, and they are updating their principal and interest every year as it clicks over with the higher interest rate.”
He pointed out the genesis of the NALI regime, and its later extension to non-arm’s-length expenditure, was due to the presence of low or no interest LRBAs before 2017 and PCG 2016/5 was introduced to ensure they had a prescribed interest rate and were making regulator repayments of principal and interest.
The guide also sets out the safe harbour terms on which an SMSF could structure a related-party LRBA on an arm’s-length basis, while Law Companion Ruling (LCR) 2021/2 released by the ATO made a distinction between acquisition costs and other expenditure that relates to an asset, he added.
“The ATO state in LCR 2021/2 ‘interest expense incurred under an LRBA is an example of expenditure that is incurred in relation to the acquisition of an asset’, so [if those repayments are wrong], you are not going to get a lot of leniency with an LRBA here.”
Jason Spits
SENIOR JOURNALIST
Jason is a senior journalist with Benchmark Media and writes for the selfmanagedsuper website and magazine and smstrusteenews website. He has covered financial services since 1999 and has written about life insurance, superannuation, investment management and financial advice, in both a freelance and in-house capacity, and also did a brief stint as a media manager for an industry association. He has been the editor of trade titles Money Management and Financial Standard, and was most recently senior journalist with life insurance title Riskinfo.
Articles by Jason