ATO warns about 31 January deadline for arm’s length LRBAs

The ATO has reminded SMSF trustees and professionals about the 31 January 2017 deadline to ensure Limited Recourse Borrowing Arrangements (LRBAs) are on an arm’s length basis.

In 2016 the ATO issued PCG 2016/5 and TD 2016/16, which sets out the ATO’s view on when an LRBA would be on a non-arm’s length basis and creates a ‘safe harbour’.

The ATO says it will not select SMSFs for an income tax review for 2014/15 or earlier years “purely” because the fund had an LRBA. But this is conditional on SMSF trustees ensuring that any LRBA is on an arm’s length basis, or the LRBA is stopped, by 31 January 2017.

Given this, we will not select an SMSF for an income tax review for the 2014-15 year or earlier years purely because the SMSF has entered into an LRBA. However, this is conditional on the SMSF trustee ensuring that any LRBA that their fund has is on terms consistent with an arm’s length dealing by 31 January 2017 or, alternatively, is brought to an end by 31 January 2017. This deadline was originally 30 June 2016, but it was extended after the ATO was told that trustees required more time.

The ATO has set out a two-step process to determine if the Non-Arm’s Length Income (NALI) rules – which can increase the amount of tax an SMSF pays on income from the arrangement – apply as a result of a LRBA.

This includes a “quick guide”:

Quick guide

Are borrowing terms consistent with safe harbours in Practical compliance guidelines (PCG), or other evidence that demonstrates they are arm’s length?

Yes – trustee does not need to consider TD 2016/16.

No – trustee needs to consider TD 2016/16 to determine if income is NALI.

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