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Hi What are the rules around refinancing a bank LRBA loan with related party loan. Generally related party LRBA loans have a 15yr term but what if its a refinance of an existing loan which is about 5years in? Would it be a breach if the term is refreshed to 15years?
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Hi Neetu
Yes a SMSF can replace a bank loan (used to acquire real property) with a related party loan.
My view is that there is no issue with the related party loan being for 15 years if the existing loan has 5 years left. This is on the basis that the related party loan is done on an arm's length / commercial basis.
The Fund would need to also comply with the safe harbour requirements found at PCG 2016/5 - Income tax - arm's length terms for LRBAs established by SMSFs.
It states in the PCG at paragraph 7 that:
"The ATO accepts that an LRBA used to acquire real property, or to refinance a borrowing used to acquire real property, is consistent with an arm's length dealing if the terms of the borrowing are established and maintained throughout the LRBA as set out in the following table."
Extract from the "table":
"Variable interest rate loan (re-financing) - maximum loan term is 15 years less the duration(s) of any previous loan(s) relating to the asset (for both residential and commercial)."
Thanks
SMSF AAA