Does your SMSF include a limited recourse loan?

About the author:

Author name:

By Terri Bradford

Job title:

Head of Wealth Management

Date posted:

11 April 2016, 10:18 AM

The Australian Tax Office (ATO) recently released their "safe harbour guidelines" for limited recourse borrowing arrangements within self managed super funds.

The guidelines set out the ATO's expectations of any loan arrangements that may be made between trustees of a self managed super fund (SMSF) and a related party (the related party usually being the trustees of the SMSF personally loaning money to their SMSF).

Where a loan is in place for the purchase of either property or a collection of shares the ATO will expect the terms of the loan to be consistent with the guidelines. Essentially, this includes:

• whether the interest rate is at a rate similar to the standard housing loan rate for investors;
• the maximum term allowed for fixed rate loans;
• the maximum term of the loan (different for property vs shares);
• the maximum loan to market value ratio (LVR) that can apply, and;
• the requirements for monthly repayments.

SMSF trustees have until 30 June 2016 to ensure any existing loan meets the safe harbour guidelines. This means trustees have only a few short months to either change the terms of the loan so they are consistent with the commercial terms required, bring the loan to an end if they don't think it is possible to change the terms, or refinance with a commercial lender.

Importantly, once the terms are set at commercial rates trustees must ensure they make monthly repayments of principal and interest repayments. The repayments cannot be interest-only.

Where the ATO finds an arrangement does not meet the safe harbour terms the trustees cannot be assured that arrangement will be accepted as being consistent with arms length dealing. If that is the case, any income from that investment will be deemed 'non-arms length income' and taxed at the highest marginal tax rate.

SMSF trustees who currently hold a limited recourse borrowing arrangement within their SMSF should review their loan terms immediately so they are not caught out when June 30 rolls around. It can take time to refinance or replace documentation - the time to act is now.

If you would like to review your current SMSF loan arrangements, contact your Morgans adviser.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents ("Morgans") do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.