Arm's length terms for LRBAs - safe harbour guidelines published
Non arm's length limited recourse borrowing arrangements (LRBAs) - safe harbour guidelines
The ATO's Practical Compliance Guideline PCG 2016/5 was published today. PCG 2016/5 sets out the 'safe harbour' terms on which SMSF trustees may structure their LRBAs consistent with an arm's length dealing. That is, for income tax compliance purposes, the Commissioner accepts that an LRBA structured in accordance with the 'safe harbour' terms set out in PCG 2016/5 is consistent with an arm's length dealing and that the non-arm's length income (NALI) provisions do not apply purely because of the terms of the borrowing arrangement.
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.
Further information on limited recourse borrowing arrangements is available on our website at Limited recourse borrowing arrangements - questions and answers