Urgent action required before 31 January 2017 – safe harbour rules for SMSFs borrowing from related parties (LRBAs)

The deadline for dealing with related party loans to SMSFs for LRBAs is fast approaching. In order to comply with the safe harbour guidelines outlined in PCG 2016/5, you must ensure the related party loans are on arm’s length terms before 31 January 2017.

For related party loans to be on arm’s length terms, the loan must, before 31 January 2017, be:

• on terms consistent with either:
  • the safe harbour guidelines published by the ATO in PCG 2016/5; or
  • a loan from an arm’s length lender (which can be supported by independent third party evidence); and
• supported by a registered mortgage or security over the acquired asset.

If you have not yet reviewed or updated your clients’ related party loans to ensure they comply with PCG 2016/5, you should take urgent action to ensure the non‑arm’s length income rules will not apply to the SMSFs because of the loan terms.

For further guidance on what is required to comply with the safe harbour guidelines, please see our alert dated 8 April 2016. It is also a good opportunity to review the other parts of the LRBAs to make sure there are no other compliance issues. We have seen many LRBAs with related party loans that do not comply with the rules for other reasons.

Please contact a member of our team if you would like to discuss this further or have us assist with reviewing your clients’ related party loans.