What are the parameters of the safe harbour?

21 April 2016

The ATO has issued two sets of parameters: one for real estate investments and the other for listed securities.  No parameters have been issued for LRBAs which involve other types of assets such as private company shares and units in private unit trusts, business assets and personal property.  With no safe harbour available the benchmarking life boat is the only sanctuary from Cyclone ‘ATO’.

For real estate the parameters are -

  • Loan Agreement:  a written and executed loan agreement
  • Interest Rate:  Reserve Bank of Australia Indicator Lending Rates for banks providing standard variable investor housing loans.  For 2015-16 financial year this rate is 5.75%.  The rate applying to the 2016-2017 financial year will be released in May 2016
  • Variable Interest Rate:  permitted provided the rate of interest must be the indicator rate set for each financial year
  • Fixed Interest Rate:  permitted so long as the fixed period does not exceed 5 years and the fixed rate must be the indicator rate which is applicable at the commencement of the loan.  The maximum period of 5 years cannot be extended by refinancing the loan with another related party LRBA
  • Loan term:  maximum 15 years.  The maximum term commences from the actual commencement date of the loan and cannot be extended by refinancing the loan with another related party LRBA
  • Loan repayments:  must be principal and interest.  Interest only arrangements are outside the guidelines.  Interestingly, the guidelines do not specify the amount of principal to be repaid.  Presumably the amount of principal repayment would match commercial lender loans
  • Frequency of loan repayments:  monthly
  • Loan to market value ratio:  cannot exceed 70% (it is irrelevant whether the property is commercial or residential) at the commencement of the loan
  • Security:  registered mortgage
  • Personal Guarantees:  not required but if they are provided, a higher LVR cannot apply.

 

For listed securities (such as listed shares, listed units) the parameters are -

  • Loan Agreement:  a written and executed loan agreement
  •  Interest Rate:  Reserve Bank of Australia Indicator Lending Rates for banks providing standard variable investor housing loans plus 200 basis points  For 2015-16 financial year this rate is 7.75% (that is 5.75% plus 2%)
  • Variable Interest Rate:  the rate of interest must be the indicator rate set for each financial year
  • Fixed Interest Rate:  permitted so long as the fixed period does not exceed 3 years and the fixed rate must be the indicator rate which is applicable at the commencement of the loan.  The maximum period of 3 years cannot be extended by refinancing the loan with another related party LRBA
  • Loan term:  maximum 7 years.  The maximum term commences from the actual commencement date of the loan and cannot be extended by refinancing the loan with another related party LRBA
  • Loan repayments :  must be principal and interest.  Interest only arrangements are outside the guidelines.  Interestingly, the guidelines do not specify the amount of principal to be repaid.  Presumably the amount of principal repayment would match normal commercial lender loans
  • Frequency of loan repayments:  monthly
  • Loan to market value ratio:  cannot exceed 50% at the commencement of the loan.
  • Security:  must be a registered charge
  • Personal Guarantees:  not required but if they are provided, a higher LVR cannot be used.

If an LRBA involves property other than real estate or listed securities, there are no safe harbour guidelines provided.  Trustees will have to rely on the benchmarking method to ensure that their arrangements are not considered to be non-commercial.  

Benchmarking involves going to the lending market and finding a commercial lender (bank, building society or other credit provider) who is willing to provide finance for the relevant type of property and then ensuring that the terms of the arrangement match the benchmark.

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