Limited Recourse Borrowing Arrangements / SMSF

Clock is ticking on zero interest SMSF loans

ATOID 2015/28

New measures that took effect from September 2015 for instalment warrants and limited recourse borrowing arrangements (LRBA) confirmed what had been a long-standing practice in industry – where an SMSF enters into a LRBA, for income tax purposes, the consequences of ownership of the instalment trust asset (ITA) flow to the SMSF (as the beneficial holder of the interest in the asset), instead of to the holding trustee.

Following these legislative changes to the look through treatment of these limited recourse borrowing arrangements, the ATO has now provided updated guidance on the application of the non-arm’s length income (NALI) provisions for such non-commercial LRBAs.  These updated interpretative decisions importantly don’t change the ATO’s previous views on applying the NALI provisions, in particular where key features of the related party loan may include a zero (0%) interest rate.   The updated ATOIDs simply amend the applicable section within s.295-550 of the ITAA 1997, now applying subsection 295-550(1), rather than subsection (5) as the look-through provisions now recognise the fund as the beneficial holder of the asset.

The updated ATO interpretative decisions are:

  • ATOID 2015/27 (formerly ATOID 2014/39 – now withdrawn) – application of the NALI provisions for a related party non-commercial LRBA to acquire listed shares
  • ATOID 2015/28 (formerly ATOID 2014/40 – now withdrawn) – application of the NALI provisions for a related party non-commercial LRBA to acquire real property

Fixing non-commercial loan arrangements

Further to these updated determinations, the ATO has also provided important timeframes for fund trustees to remedy any existing non-commercial related party loans.  Where trustees have in place arrangements that are similar to those outlined within the above ATOIDs, the ATO has indicated the following via their website:

SMSF trustees should review any LRBA you have to determine whether it was established and maintained on terms that are consistent with an arm’s length dealing. If this is not the case, we strongly encourage you to take steps to ensure that it is on terms consistent with an arm’s length dealing by 30 June 2016 or to bring the LRBA to an end by that date. You may wish to seek professional advice if you are unsure.

The ATO has indicated that they will not be selecting any SMSFs for review for the 2014–15 year or earlier years purely because the fund has entered into a LRBA.  However, it is likely that the Commissioner will allocate compliance resources to review a LRBA of an SMSF for the 2015–16 year or later years.

As a result, the ATO has strongly encouraged all SMSF trustees to review existing related party arrangements and take any necessary actions prior to before 30 June 2016.  In addition, it is important that any new LRBAs (with related party loans) that may be entered into are established and maintained on terms consistent with an arm’s length dealing.

Further information about this can be found on the ATO website,




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