Limited Recourse Borrowing Arrangements

Extension of time for arm’s length borrowings to comply

ato-extend-lrba-time

The ATO has announced that it is allowing SMSF trustees additional time until 31 January 2017 to ensure that any limited recourse borrowing arrangements currently in existence are operating on terms consistent with an arm’s length dealing, or alternatively are brought to an end.  The Regulator had previously indicated that these non-commercial arrangements needed to demonstrate arm’s length terms by 30 June 2016.

Why is the deadline being extended?

Following on from the ATO’s guidance in ATOID 2015/27 and ATOID 2015/28, the Regulator had stated in December 2015 a requirement to review certain LRBAs by 30 June 2016, or otherwise risk income from the arrangement being subject to the non-arm’s length income (NALI) provisions.

What has followed on 6 April 2016 was the issuing of Practical Compliance Guideline 2016/5 which stated various safe harbours for trustees to help demonstrate an arrangement being maintained on terms consistent with an arm’s length dealing.  Where trustees would struggle to comply with these terms prior to 30 June, they were to make contact with the Regulator to determine a pathway to comply.  After a range of individual requests from SMSFs to allow them further time beyond 30 June 2016, the ATO has recognised many of the complex issues in having to satisfy:

  • the safe harbours set out within PCG 2016/5; or
  • terms that demonstrate an arm’s length dealing

Following on from these requests, it has also been recognised that further ATO guidance about some aspects of the non-arm’s length income (NALI) rules would be beneficial to these type of transactions.  In particular, taxpayers may benefit from further practical guidance clarifying the circumstances in which an SMSF will be taken to receive a greater amount of ordinary or statutory income under a particular non-arm’s length arrangement, compared to the amount which it would have received under an arm’s length arrangement.

This guidance may assist SMSF trustees and advisers to make decisions about whether the NALI rules apply to their particular arrangements.

What the ATO will do

The ATO has indicated that by 30 September 2016 they will provide further information and illustrative examples to assist SMSF trustees and advisers to make decisions about relevant arrangements.

As a result of this extension in time, the ATO will not select an SMSF for an income tax review purely because it has a LRBA for the 2014-15 income years and prior, provided that:

  • The SMSF trustee ensures that any LRBA’s that their fund has is on terms consistent with an arm’s length dealing, or is alternatively brought to an end by 31 January 2017; and
  • Payments of principal and interest for the year ended 30 June 2016 must be made under LRBA terms consistent with an arm’s length dealing by 31 January 2017.

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