ATO extends deadline for complying with new requirements for related party loans to superannuation funds

The ATO has thrown a lifeline to SMSF trustees in the rush to get limited recourse borrowing arrangements (LRBAs) on commercial terms by the end of this 2016 financial year.

Previously, the ATO released Practical Compliance Guideline 2016/5 (PCG 2016/5), which required SMSF trustees to review all of their related party loan arrangements for LRBAs to ensure they were on arm’s length terms by 30 June 2016.

Failure to do so could result in income from the LRBA being assessed as non-arm’s length income (NALI).

However, the ATO has extended the deadline to 31 January 2017 to give trustees more time to comply with the new guidelines.

This move is welcome given the current uncertainty regarding superannuation contribution caps, which were one weapon available to address some issues with related party loan arrangements.

This means that, by 31 January 2017, trustees of SMSFs with a LRBA from a related party lender must:

• ensure the whole arrangement is consistent with arm’s length dealings – see our previous alert for these requirements;
• pay principal and interest consistent with an arm’s length dealing for the year ended 30 June 2016 and the period up to 31 January 2017; and
• reduce the principal of all loans to 70% or less of the property value.

Alternatively, SMSF trustees must bring the LRBA to an end by 31 January 2017.

The ATO plans to release further information and examples by the end of September in relation to the Safe Harbour Rules contained in PCG 2016/5.

While this extension creates extra breathing room for SMSF trustees, we recommend that all LRBAs are reviewed as soon as possible to ensure that they comply with the ATO’s position.