Related party LRBA deadline looms with important details still to be resolved
Self-managed superannuation fund trustees with related party loans face a difficult few months, with an Australian Taxation Office regulatory deadline looming but important details still up in the air.The ATO has set a deadline of June 30, when all related party limited recourse borrowing arrangements must be on commercial terms.AMP SMSF head of policy, technical and educational services, Peter Burgess, told delegates at this week's SMSF Association National Conference that the definition of what would be considered safe harbour arrangements was yet to be finalised.Burgess said an industry working group had come up with what it considered to be commercial terms but it was not clear that the ATO would adopt them.He said the interest on property loans would be the same as the one applied by the ATO when setting a benchmark rate for related party loans by companies to their directors or executives - so-called Division 7A interest. That rate is currently 5.45 per cent.For loans used to acquire other assets the benchmark would be Division 7A interest plus two per cent.The ATO's focus has been on the interest rate applied in such loans but the whole arrangement will have to be on commercial terms from June 30.In essence the SMSF trustee would have to show that it could obtain a loan at arm's length on terms that are similar to the ones used in the related party loan.Burgess said the working group's other safe harbour provisions include: the maximum loan-to-valuation ratio would be 70 per cent; the term of the loan would be 15 years; payments would be made at least annually; and security would be a registered mortgage.