SMSF adviser logo
subscribe to our newsletter

Related-party LRBA variations and PCG 2016/5

By Shaun Backhaus and Bryce Figot
11 March 2021 — 3 minute read

Advisers would be well aware of the ATO’s “safe harbour” regarding the application of non-arm’s length income (NALI) to related-party limited recourse borrowing arrangements (LRBAs).

Broadly, the ATO’s Practical Compliance Guideline PCG 2016/5 (Guideline) sets out “safe harbour” terms on which SMSF trustees may structure their LRBAs which the ATO will consider are consistent with an arm’s length dealing. That is, the commissioner accepts that an LRBA structured in accordance with the Guideline is consistent with an arms length dealing and that the NALI provisions do not apply purely because of the terms of the borrowing arrangement.

While a related-party borrowing falling outside of the terms in the Guideline will not necessarily mean the arrangement will result in the application of the NALI provisions, such an arrangement will not enjoy the benefit of the certainty provided by the Guideline. If an LRBA falls outside the terms of the Guideline, an SMSF trustee will need to be able to demonstrate that the arrangement was entered into and maintained on terms consistent with an arms length dealing, such as by obtaining benchmarking evidence from unrelated lenders.

LRBA variations

Following the release of the Guideline in April 2016, the ATO initially required each SMSF trustee with a non-bank LRBA to ensure it was on arm’s length terms by 30 June 2016. Following the May 2016 federal budget’s announcement of a substantial reduction to the non-concessional contributions cap, this deadline was extended to 31 January 2017.

The Guideline provided that LRBAs would not be subject to any further compliance action for the 2015 income year (or before) if, by 31 January 2017, the LRBA was:

  • on terms that are consistent with an arm’s length dealing from 1 July 2015; or
  • brought to an end, and payments of principal and interest are made under LRBA terms from 1 July 2015 consistent with an arm’s length dealing.

Many SMSF trustees were required to amend the terms of an LRBA in place to fall within the Guideline’s terms. As part of this, SMSF trustees would often need to make an additional “catch up” payment to make up for principal and/or interest repayments that would have been paid had the amended terms been in place from 1 July 2015.

Variation with effect from 1 July 2015

However, even today, there are many SMSF trustees that have not varied the terms of an LRBA in place prior to the introduction of the Guideline and, as such, there are many SMSFs with NALI exposure.

The Guideline’s requirements and transition period remain the same, such that any variation to terms would need to take effect from 1 July 2015 (and even then, there still remains NALI exposure). For these SMSFs, the amount of additional interest and/or principal “catch up” payments required may be quite large and it may be difficult for such SMSFs to make such a payment. If not paid immediately, such amounts owing could result in a default under the loan or amounting to another loan itself.

While an SMSF in this position cannot technically enjoy the benefit of the safe habour, as the variation was not made by 31 January 2017, making such a variation is likely to now provide the best chance of minimising the NALI exposure.

Voluntary disclosure

An SMSF with an LRBA in place that was not amended to fall within the Guideline (and which is not likely to be considered an arm’s length arrangement) should also consider making a voluntary disclosure to the ATO. By proactively approaching the ATO with rectification already carried out (or with a plan to do so), an SMSF can greatly improve its chances of continuing the LRBA without any NALI implications or related penalties/interest arising.


There are still a number of SMSFs with related-party LRBAs that may not have been established or maintained on an arm’s length basis and do not fall within the terms of the Guideline. Advisers should carefully review any LRBA that was established prior to the Guideline’s introduction to ensure the arrangement either falls within the Guideline’s terms or can otherwise be proven to be consistent with an arm’s length arrangement. If appropriate, an SMSF trustee can make a voluntary disclosure or otherwise engage with the ATO to minimise any potential negative impacts.

By Shaun Backhaus, lawyer (This email address is being protected from spambots. You need JavaScript enabled to view it.) and Bryce Figot (This email address is being protected from spambots. You need JavaScript enabled to view it.), director, DBA Lawyers

Related-party LRBA variations and PCG 2016/5
shaun backhaus bryce figot smsf
smsfadviser logo
You need to be a member to post comments. Become a member for free today!
Tony Zhang

Tony Zhang

Tony Zhang is a journalist at Accountants Daily, which is the leading source of news, strategy and educational content for professionals working in the accounting sector.

Since joining the Momentum Media team in 2020, Tony has written for a range of its publications including Lawyers Weekly, Adviser Innovation, ifa and SMSF Adviser. He has been full-time on Accountants Daily since September 2021.

Comments powered by CComment


Get the latest news and opinions delivered to your inbox each morning