In December 2015 The Australian Taxation Office (ATO) stated that it would not take active steps to review non-commercial limited recourse borrowing arrangement (LRBA) loans prior to 30 June 2016. It was recommended that LRBA loans should be put on arm’s length terms by 30 June 2016. If that occurred then the ATO had stated that it would not actively review such non-commercial LRBAs for prior years.
The ATO has now made an important clarification to the above concession. The rectification must not only involve putting the loan on commercial terms by 30 June 2016, but also requires that the loan be on commercial terms for the entire 2015/16 income year. This could mean that by 30 June 2016 a self managed superannuation fund (SMSF) trustee may have to top up its interest payments for the year, repay a year’s worth of principal and reduce the loan’s loan to value ratio (LVR).
Further clarification of this requirement is expected in coming weeks from the ATO, as well as more information about the proposed safe harbours for what will be deemed to be a commercial arrangement.
SMSF trustees with non-commercial loans in place should start reviewing their arrangements now to ensure they can put them on commercial terms and assess how they may fund any necessary payments of principal and interest for the 2015/16 year.
To discuss this further or for more information, please contact: