The Superannuation Industry Relationship Network has proposed new guidelines to the ATO on LRBAs, following extensive industry lobbying for more clarity on what constitutes borrowing on commercial terms.
The ATO expects SMSFs with an LRBA to have them on commercial terms by 30 June this year, which was made explicitly clear in a statement last December.
This follows two interpretative decisions released in late 2014, which indicate that borrowings on non-commercial terms can cause non-arm’s length income.
In a meeting late last year, the Superannuation Industry Relationship Network told the ATO it is unclear within the industry what exactly constitutes commercial terms.
As a result, the ATO agreed to form a separate working group, which would discuss and provide guidance on what should be considered commercial terms.
That working group has now put forward recommendations to the ATO, although they are yet to be accepted. Some of these recommendations include that a benchmark interest rate that should be used is division 7(a), which currently stands at 5.45 per cent.
The group has also recommended a maximum loan-to-value ratio of 70 per cent and loan repayments to be made annually at a minimum.
Once this safe harbour has been finalised, if the loan complies with these terms, then the trustee can have certainty they will not be hit with non-arm’s length income SuperConcepts head of technical Peter Burgess said.
“We expect the finalisation soon because we are running out of time before 30 June,” Mr Burgess said.
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