Implications for SMSFs with phase 2 of ABA’s loan relief

Banks have agreed to extend loan repayment holidays by up to four months (no later than 31 March 2021) for customers unable to meet their obligations due to income loss linked to COVID-19.

Smarter SMSF chief executive Aaron Dunn said this second phase of relief will be important for SMSFs with related-party loans that are struggling to make loan repayments.

In an online article, Mr Dunn reminded SMSFs that under its COVID-19 relief, the ATO will allow SMSFs to move outside the boundaries of the safe harbour provisions in PCG 2016/5 in order to obtain loan repayment relief as long as it is on similar terms to what the commercial banks are offering.

“In this instance, the ATO will accept that the parties are dealing at arm’s length and the NALI provisions will not apply. Specifically, we saw banks provide temporary repayment deferrals for most businesses up to six months, with unpaid interest being capitalised on the loan,” Mr Dunn explained.

With parts of Australia still working through the challenges of reopening their economy due to COVID-19 and this six-month loan repayment deferral period fast approaching, the ABA implemented a new phase of support in assisting customers with making repayments.

“This next phase will see some customers now being required to restart paying their loans at the end of the six-month deferral period,” he stated. 

“For those still struggling due to reduced incomes and ongoing financial difficulties due to COVID-19, these people will be contacted towards the end of the deferral period to ensure that, wherever possible, they can return to repayments through a restructure or variation to their loan.”

If these arrangements are not in place at the end of the six-month deferral, customers will be eligible for an extension for up to four months. This period, he said, will allow for the customer to work with their bank to find the best solution for them.

“Following the ATO’s previously published guidance in respect to providing loan relief, this updated ABA guidance provides an important framework for trustees and professionals to follow in supporting SMSFs that will continue to have issues in meeting loan repayments due to COVID-19,” Mr Dunn explained.

“It is important to note that a deferral extension of up to four months will not be automatic, rather provided only to those who genuinely need some extra time. For SMSFs, this is going to be important to evidence the decision to extend any loan relief, as has been the case initially when the pandemic started to impact rents and the ability to repay loans.”

Mr Dunn said banks will be working with customers to find the best options to restructure or vary their loan. This may include extending the length of the existing loan, converting to interest-only payment for a period of time, consolidating debt and any combination of these and other measures.

The lender and SMSF will need to determine the most appropriate path forward.

“It is expected that the ATO will update its SMSF FAQs page to reflect this extended position by the Australian Banking Association and contemplate how some of these negotiated measures continue to demonstrate that the arrangement will not be subject to the NALI provisions where it operates outside of the PCG 2016/5 safe harbour,” Mr Dunn said.