The ATO have today issued their much anticipated Practical Compliance Guidelines PCG 2016/5.
The Guideline sets out what the ATO will consider as ‘Safe Harbour’ terms on which an SMSF can structure a LRBA consistent with an arm’s length dealing.
So we need to understand what the ‘Safe Harbour’ guidelines are about.
It appears as though the Commissioner will accept that a non-bank LRBA on the terms set out in the guideline will be consistent with an arm’s length dealing and therefore no NALI (“Non arm’s length income”) will apply. BUT the Safe Harbour does not cover any other element of the property or securities transaction, such as whether the asset was acquired at market value, and therefore the Commissioner may still consider NALI outside of the guidelines.
The consequence of NALI is pretty nasty – as the income derived from those assets will be taxed at 47% for the 2016 financial year within the SMSF – even if the SMSF is fully in pension phase.
The ‘Safe Harbour’ provisions are also only dealing with real property & listed securities, so do not cover unlisted securities
It is absolutely essential that all non-bank LRBAs be reviewed prior to 30 June.
The ATO has stated that it understands the importance of preserving assets held by an SMSF & the effects of the NALI provisions. So, they will not select an SMSF for review for the 2014-15 year or earlier purely because the SMSF has entered into an LRBA. However, it is conditional on the SMSF ensuring that the terms of any non-bank LRBAs meet the guidelines.
What needs to be done before 30 June 2016?
So, essentially and in accordance with the guidelines there are three options.
Option 1 – Alter the terms of the loan to meet guidelines
Option 2 – Refinance through a commercial lender
Option 3 – Pay out the LRBA
Each option will have many pro’s and con’s – so it is important to understand what the practical implications of each option are, and how physically you will approach each option.
