ATO extends SMSF non-arm’s length LRBA deadline

The ATO has extended the deadline for SMSFs to fix non-arm’s length income issues with LRBAs.

The ATO had previously advised SMSF trustees to review Limited Recourse Borrowing Arrangements (LRBAs) to ensure they are on an arm’s length basis by 30 June 2016. This deadline has now been extended to 31 January 2017.

“Since the issue of our Practical Compliance Guideline 2016/5 on 6 April 2016 we have received several individual requests from SMSFs to allow them further time beyond 30 June 2016 to review the terms of their LRBA arrangements to ensure that their arrangements are on terms consistent with an arm’s length dealings,” said an ATO statement announcing the extension of time.

“Consideration of these individual requests has highlighted that many taxpayers may require more time in order to review the terms of LRBA’s. Requests from taxpayers have also highlighted that taxpayers may benefit from further ATO guidance about some aspects of the non-arm’s length income (NALI) rules. In particular, taxpayers may benefit from further practical guidance clarifying the circumstances in which an SMSF will be taken to receive a greater amount of ordinary or statutory income under a particular non-arm’s length arrangement, compared to the amount which it would have received under an arm’s length arrangement.”

The ATO says that further information will be provided by 30 September 2016.

Therefore, we will not select an SMSF for an income tax review purely because it has an LRBA for the 2014-15 income years and prior, provided that:

  • The SMSF trustee ensures that any LRBA’s that their fund has is on terms consistent with an arm’s length dealing, or is alternatively brought to an end by 31 January 2017; and
  • Payments of principal and interest for the year ended 30 June 2016 must be made under LRBA terms consistent with an arm’s length dealing by 31 January 2017.

There has been concern that the proposed 2016 Budget changes to non-concessional contributions would make it difficult for some SMSFs to resolve issues with LRBA arrangements, though this wasn’t mentioned by the ATO.

The deadline extension has been welcomed by the SMSF Association (SMSFA).

“We welcome this extension of time granted by the ATO,” said SMSFA CEO Andrea Slattery.

“The 30 June 2016 deadline was a tight deadline for trustees to take remedial action to ensure that their LRBAs were being held on an arm’s length basis. Feedback from our members prompted us to request the ATO to give SMSF trustees and their advisors more time to take the necessary steps.”

“This extension of time shows that the ATO is listening to the SMSF sector’s concerns as well as reinforcing why we believe it is the right regulator for our part of the superannuation industry.”

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