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Hi
I hope you are well.
I was wondering if the regular re-payments of the loan is mandotory when a loan is taken out under LRBA arrangement .
Please advise any possible contravention.
Regards
Dawood Hassan
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Hi Dawood
PCG 2016/5 "Income tax - arm's length terms for Limited Recourse Borrowing Arrangements established by self-managed superannuation funds" at paragraph 7 requires that if you had a related party lender (or any lender) it may not be considered to be done on an arm's length basis if principal and interest is not paid by the Fund on a monthly basis.
If such a situation occured where if regular repayments not ocurring to a related party lender you may have a breach of section 109 of SIS the arm's length requirement re investments.
Further there is a risk that the ATO would treat any income from the property as NALI if the loan / LRBA has not been made on an arm's length basis.
The ATO states at paragraph 4 that:
"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."
Refer PCG 2016/5 at:
https://www.ato.gov.au/law/view.htm?DocID=COG/PCG20165/NAT/ATO/00001
Thanks
The Auditors Institute