ATO announces plans to review safe harbour rules
The ATO has stated it will be reviewing its safe harbour guidance in PCG 2016/5 to ensure it is still current in light of the proposed reforms to Division 7A.
Back in 2016, the ATO released Practical Compliance Guideline (PCG) 2016/5, which sets out the safe harbour terms on which SMSF trustees may structure their limited recourse borrowing arrangement consistent with an arm’s-length dealing.
The PCG provides SMSFs with certainty that if they apply the terms set out in the PCG, the non-arm’s length income provisions won’t apply to their arrangement.
ATO assistant commissioner, SMSF segment, Steve Keating said the ATO will be looking to review PCG 2016/5 to ensure it is still relevant.
“We’re looking at [PCG 2016/1] again to ensure its currency. There’s been some commentary around Division 7A that we’re looking at and we want to ensure that it continues to be current,” Mr Keating said at the LightYear Docs Virtual Strategy Summit.
The amendments to Division 7A, which were due to commence 1 July this year but have not yet been passed as law, have the potential to give rise to larger loan repayments than currently allowed under the PCG for SMSFs with certain types of related-party loans. The earliest start date for the reforms will now be 1 July 2021, if the legislation is enacted by then.
The amendments will impact LRBAs financed by related parties who need to comply with Division 7A requirements. An LRBA with a potential Division 7A issue needs to meet both Division 7A criteria and the ATO’s PCG 2016/5 to ensure the loan is not deemed a dividend under Division 7A and remains on arm’s-length terms.
DBA Lawyers director Daniel Butler previously warned that once the reforms become law, some related-party loans may become untenable.
“One of these proposals is that there’s going to be a maximum 10-year limit. The current limit is 25 years where it is secured sufficiently on real property,” he said previously.
Mr Keating noted there has also been a lot of interest from the SMSF community around the law companion ruling on non-arm’s length expenditure.
“We did some initial consultation on that particular LCR. We’re looking at that now and we’re looking to undertake some more targeted consultation before we finalise that ruling,” he stated.
Miranda Brownlee
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.
