Changes to SMSF “Safe Harbour” Guidelines

In an earlier article this year we mentioned the ATO’s Practice Compliance Guideline 2016/5 on what constitutes arm’s length borrowing terms for limited recourse borrowing arrangements (LRBA).

PCG2016/5 sets out the “Safe Harbour” terms on which SMSF trustees may structure their LRBA’s consistent with an arm’s length dealing.

For existing LRBA’s with related parties, PCG2016/5 states that the ATO will not select an SMSF for income tax review for the 2014-15 year or earlier years in certain circumstances provided that the SMSF entered into or amended its LRBA’s consistent with an arm’s length dealing by 30 June 2016.

However, since the release of PCG2016/5 the ATO has determined that many taxpayers may require more time in order to review the terms of their LRBA’s.  The ATO has advertised that it will not select an SMSF for income tax review purely because it has an LRBA for the 2014-15 income year and prior years, provided that the SMSF trustee ensures that any LRBA’s their fund has is on commercial terms, or is alternatively brought to an end by 31 January 2017.

It is anticipated that by September 2016 the ATO will provide further information and illustrative examples to assist SMSF trustees to make decisions about their LRBA arrangements.

If you require assistance in establishing an LRBA or amending your existing LRBA’s so that they are on arm’s length commercial terms by 31 January 2017, please contact Andrew Bini.

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SMSF related party borrowings under “Safe Harbour” guidelines

In recent years the ATO adopted the view that all loans by related parties to trustees of SMSF’s should be on arm’s length terms to ensure the income of the SMSF is not taxed at the top marginal rate.


In April 2016, the ATO issued Practical Compliance Guideline 2016/5 which contains the ATO’s approach to determining what are arm’s length borrowing terms for LRBA’s.


PCG 2016/5 sets out “Safe Harbour” terms on which SMSF trustees may structure their LRBA’s consistent with an arm’s length dealing.  Two Safe Harbour models are provided: one for borrowings to purchase real estate; the other for borrowings to purchase stock exchange listed shares or units.


The models set out various requirements (including interest rates, a maximum LVR of 70%, registered mortgages, 15 years maximum loan term and monthly repayment of principal and interest) which if adopted will assist SMSF’s to claim the borrowings are on arm’s length terms.


The Safe Harbour rules apply to existing and proposed LRBA’s established after the release of PCG 2016/5.


For existing LRBA’s with related parties, PCG 2016/5 states the ATO will not select an SMSF for income tax review for the 2014-15 year or earlier years purely because the SMSF has entered into an LRBA, however this is conditional upon the SMSF ensuring that any LBRA’s that their fund has are consistent with an arm’s length dealing by 30 June 2016.


We can assist with review and variation to existing LRBA’s and the preparation of new LRBA’s which comply with PCG 2016/5.

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