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Can an unrelated party which is not a bank or a financial institution lend to an SMSF? The argument from the trustee is that the amount to be lent is $100k which is considerably lower for a broker to get involved with and hence, it would be practical to borrow from a private unrelated party. I think yes it can provided the terms are commercial but never seen this kind of situation previously so thought I should ask.
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Hi Yuvraj
Yes a SMSF could borrow money under a LRBA and the lender could be an unrelated party that is not a bank or financial institution.
The Fund should comply with the safe harbour requirements found at PCG 2016/5 - Income tax - arm's length terms for LRBAs established by SMSFs.
It 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."
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."
Thanks
The Auditors Institute