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An SMSF established a LRBA with a related party in 2015. The terms of the loan agreement match the safe harbour terms set out in PCG 2016/5. The LRBA was for $1.3m with a term of 15 years. As at 30/6/2020 the fund had repaid $870k of the loan and were therefore in front of its required repayments.
In 2021 the fund only made one repayment for the year of $61k. This amount exceeds the aggregate annual repayment required, if the minimum monthly amount were to be paid. However, it does not fulfil the loan repayment terms (monthly repayments) set out in the loan agreement.
We are considering the following issue:
- Whether a singular annual payment rather than 12 monthly instalments reflects a commercial lending arrangement. Alternatively, would the monthly repayments continue to be required regardless of the amount paid in the singular month?
- What evidence the fund could provide that demonstrates the LRBA still reflects an arm's length arrangement?
Our consideration is based upon the funds requirement to transact at arms length and the potential impact of NALI.
Look forward to hearing your thoughts.
Hi Peter
My view would be that if say a loan repayment was made in July 2020 that covers the amount payable for the 2020/21 year then there would normally be no ongoing requirement to make monthly payments for the loan in that year (& no NALI implications). I would review the loan agreement & make sure it allows for this to occur. If the loan agreement does not refer to this I would request that an amendment be made to it.
The type of evidence you could obtain would be to ask a bank / commercial lender if this could occur in a normal arm's length transaction.
If other member's have a view as to how they would approach this that would be great to hear.
Thanks
SMSF AAA