Safe harbour guidelines for LRBAs
Limited recourse borrowing arrangements (LRBA) need to be set up on commercial terms to avoid an assessment (and tax penalties) as non-arm’s-length income.
The ATO’s Practical Compliance Guideline (PCG) 2016/5 has now been released, setting out two ‘safe harbour’ conditions for structuring LRBA terms when dealing with a related-party lender. One set of terms is for borrowing to buy real property. The other is to buy listed shares or units.
If the LRBA is structured using these terms, the non-arm’s-length provisions will not apply (unless other issues cause a breach). With the release of these guidelines, trustees of SMSFs can choose to:
- borrow from related parties using the safe harbour terms, or
- set up related-party loans on alternative terms but be prepared to prove commerciality to the ATO, or
- borrow from commercial lenders.
These guidelines apply to new and existing loans. All existing related-party loans should be reviewed by 30 June to ensure they are on commercial terms.
Collectables – deadline looming
The deadline for SMSF trustees to ensure all collectables and personal-use assets purchased before 1 July 2011 meet the current rules is fast approaching.
By 30 June, trustees must ensure all collectables comply with current rules, which include:
- not leased to or used by a related party,
- not stored or displayed in a private residence of a related party,
- record in writing the reasons for the decision on where to store the collectables, and
- insure the asset in the name of the fund.
Trustees need to ensure all collectables meet the rules or dispose of the assets before 1 July. If transferring assets to a related party, the market price needs to be determined by a qualified independent valuer.
Superstream for SMSFs
The deadline for the next phase of SuperStream is 30 June. This phase affects small business owners.
From 1 July, small business owners must be able to pay super and send employee information electronically in a standard format. If employers are still making super payments via cheque or direct bank transfers to the employees’ super accounts, they need to switch to an electronic payment system, such as:
- a super clearing house service (including the ATO small business clearing house),
- an electronic payroll system that meets the SuperStream standard,
- the super fund’s online payment system, or
- a messaging portal.
Changes to SMSF annual return
SMSFs are now required to provide the fund’s bank account details in the SMSF annual return (section 7, label A). In addition, if the fund has an electronic service address alias (under SuperStream requirements), this information should also be included (section 7, label C).
This information is required to enable the ATO to send super payments and information about them to the fund electronically.
Only one bank account can be nominated, so this should be the one used for any super payments.
The SMSF market
ATO statistics show the average SMSF balance has now exceeded the $1 million mark, with average balances of just under $1.05 million. However, there are still around 45 per cent of funds with total balances less than $500,000.
SMSFs hold just under one-third of all money invested in Australian super funds. This is a total of $594.6 billion in assets held in SMSFs across over 557,000 funds. The most recent annual overview statistics highlight the following trends over the past five years to 2014/15:
- the number of SMSFs has grown by 27 per cent,
- average assets of SMSFs increased by 23 per cent,
- an 8 per cent increase in funds moving into full pension phase (although the majority continue to be in accumulation phase),
- in 2013/14, SMSFs experienced the fifth consecutive year of positive returns, with a return of 9.8 per cent,
- the proportion of SMSFs with borrowing has increased from 2.3 per cent in 2010 to 6.7 per cent in 2014. As at September 2015, SMSF assets held under LRBAs was estimated at $18 billion, which is around 3 per cent of all SMSF assets.