An SMSF can use a Limited Recourse Borrowing Arrangement (LRBA) to fund the purchase of asingle acquirable asset such as property and unlisted shares. The lender is usually a financial institution such as banks or credit unions. A related party of the SMSF can also lend money to the Fund using a Related Party Loan borrowing arrangement.
The ATO published a practical compliance guide [PCG 2016/5] which sets out the safe harbour terms so Trustees can structure related party loans and LRBAs in a manner that is consistent with the arm’s-length rule.
Safe harbour provisions
Unlisted shares purchased under an LRBA are not required to abide by the safe harbour rules. The onus is basically placed on the Trustees to clearly demonstrate that the borrowing arrangement was entered into and upholds terms consistent with an arm’s-length dealing.
As an example, Trustees may demonstrate this by obtaining evidence that shows their particular arrangement is established and maintained on terms that replicate the terms of a commercial loan that is available to them in the same circumstances.
Things to consider:
- A printout from a bank’s website of general loan terms is not sufficient to meet this requirement.
- If an LRBA is over an asset for which the SMSF could not find a commercial third-party lender to provide finance to acquire the assets and so entered into a related party loan, the Trustee will be unable to demonstrate that the LRBA meets the arms-length rules.
ATO’s Guidance on PCG 2016/5
A copy of the Tax Office’s guidance on PCG 2016/5 can be viewed by clicking the box below:
