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LRBAs that do not meet PCG 2016/5

28/07/2021

An ATO SMSF News Alert summarises the position:

"For SMSF trustees with LRBAs which do not meet the “safe harbour” terms in PCG 2016/5 they cannot be assured that the Commissioner will accept the arrangement to be consistent with an arm’s length dealing.  However, this 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 the guidelines in the PCG.  Trustees will need to be able to otherwise demonstrate that the LRBA was entered into and maintained on terms consistent with an arm’s length dealing.  This may include evidence to show that the terms of the particular LRBA replicate the terms of a commercial loan that is available in the same circumstances."

Replicating the terms of a commercial loan do not relate only to the interest rate but all other terms such as duration, loan to value ratio, security, payment frequency.

Commercial non-bank lenders generally charge LRBA interest rates at par with or higher than the safe harbour rate. Bank lenders have for the time being dropped out of the LRBA market.  A related party lender may also provide limited recourse loans to their SMSF, subject to applicable rules.  A consistent low interest environment is a favourable factor for SMSF borrowings, but the considerations in relation to LRBA are many folds.  The ATO publication below provides good guidance on LRBA investment considerations.

https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/SMSF-resources/SMSF-technical/Limited-recourse-borrowing-arrangements---questions-and-answers/

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