“Re the title search as per the safe harbour requirements the security for the member loan should be a registered mortgage over the property. I question if an arm's length lender would allow a second mortgage as in your example for such an amount.”

In the case where the mortgagor does not allow the second mortgage to be registered what would the implications be for the SMSF if any other than s109 and s67?

Would the SMSF be required to sell the property to rectify the breach of the LRBA provisions since they cant get the second mortgage registered?

Hi Mihir

Thanks, you have a number of issues.

Yes a SMSF could have 2 LRBA's that is loans with more than 1 entity / lender.

If the loan was from the members this would be an issue as you have the safe harbour requirements.

The safe harbour requirements are found in PCG 2016/5 "Income tax - arm's length terms for Limited Recourse Borrowing Arrangements established by self-managed superannuation funds".

Of concern re the safe harbour requirements are that the ATO requires the loan to market value ratio to not exceed 70%. In your example the loan to value ratio is 99.4%. I expect it would be difficult for the trustees of the Fund to be able to argue that the loans at such a high loan to market value ratio could be obtained on a commercial basis.

I note that the safe harbour requirements state at paragraph 4:

"If SMSF trustees have entered into an arrangement which does not meet all of the 'Safe Harbour' terms set out in this Guideline, while the trustees are unable to be assured that the Commissioner will accept the arrangement to be consistent with an arm's length dealing, it does not mean that the arrangement is deemed not to be on arm's length terms. It merely means that there is no certainty provided under this Guideline. The trustees will need to be able to otherwise demonstrate that the arrangement was entered into and maintained on terms consistent with an arm's length dealing. One example of how a trustee may demonstrate this is by maintaining evidence that shows their particular arrangement is established and maintained on terms that replicate the terms of a commercial loan that is available in the same circumstances."

Yes the 1 custodian trustee could be the borrower for each loan / owner of the property.

Re the title search as per the safe harbour requirements the security for the member loan should be a registered mortgage over the property. I question if an arm's length lender would allow a second mortgage as in your example for such an amount.

Thanks

The Auditors Institute