June 2016: ATO grants deadline extension for related party LRBAs in SMSFs
The ATO previously released Practical Compliance Guidelines PCG 2016/5 which provided “safe harbour” thresholds and guidelines for related party limited recourse borrowing arrangements which required SMSF trustees to ensure that their related party LRBAs complied with the guideline by 30 June 2016. See our previous April 2016 newsletter which provides the specific safe harbour thresholds.
The ATO guideline required many SMSF trustees to find the liquidity to pay down related party LRBAs to come within the safe harbour thresholds by the initial deadline of 30 June 2016. In the 2016 Federal Budget handed down last month, SMSF members were hit with proposed changes to the non-concessional contribution limits by introducing a $500,000 lifetime cap which retrospectively counts NCCs made since 1 July 2007. See our May 2016 newsletter which summarises the budget proposals.
ATO GRANTS EXTENSION FOR RELATED PARTY LRBAS TO 31 JANUARY 2017
In light of the uncertainty posed by the 2016 Federal budget and the outcome of the Federal election on 2 July 2016, the ATO’s extension which allows SMSF trustees additional time until 31 January 2017 to ensure that their related party LRBAs are on arm’s length terms is a welcome measure. This extension provides trustees additional time to find the liquidity needed to pay down both principal and interest to comply with the PCG 2016/5 safe harbour guidelines.
The ATO has also announced that they will provide further information and illustrative examples to assist SMSF trustees and advisors to make decisions about relevant arrangements. PCG 2016/5 applies to real estate and listed securities and the ATO had not provided guidance on other types of property such as unlisted units in a private unit trust, unlisted shares in a private company or company title real estate. Hopefully the ATO will provide further guidance and examples for these other types of investments in September 2016.
The ATO has confirmed that they will not select an SMSF for an income tax review purely because it has an LRBA in place for the 2014-15 financial years and prior provided that:
- The SMSF trustee ensures that their LRBAs are on arm’s length terms, or are brought to an end by 31 January 2017; and
- Principal and interest payments for the financial year ended 30 June 2016 are made under arm’s length terms by 31 January 2017.
More “breathing space” has been given to “fix up” related party LRBAs but the key thing for advisors and clients to ensure is that their SMSFs have sufficient liquidity to make repayments by the new 31 January 2017 deadline. Although there is extra time, advisors and clients should take steps sooner rather than later given the time needed to calculate interest, principal repayments and address other matters.
Although we have a new 31 January 2017 deadline, many related party LRBAs have been entered into on Division 7A compliant terms between private companies and SMSF trustees and minimum loan repayments and interest rates may need to be made to comply with Division 7A by 30 June 2016.
The status of the non-concessional contribution caps is also an issue of uncertainty at this stage given that the budget announcements have not yet been made law. The outcome of the announcements (in particular, the retrospective $500,000 lifetime cap) will largely depend on the 2 July 2016 Federal election. No matter which party comes into power post-election, advisors and their clients should consider how their SMSFs can find the sufficient liquidity to ensure the loans are brought within the safe harbour thresholds prior to the new 31 January 2017 deadline.
Any legal questions, please contact Nathan Yii on 03 8658 5898 or email firstname.lastname@example.org
DISCLAIMER: This newsletter is prepared for training, educational & general information purposes only & should not be relied on as (or in substitution for) legal, accounting, financial or other professional advice.