by Marek Reardon – Special Counsel
The approach of 30 June heralds an increase in activity in business compliance activity in many industry sectors. None more so than in the Superannuation Industry and importantly as 30 June 2016 approaches there are two additional reasons to review and be ready for the coming of the new fiscal year.
Limited Recourse Borrowing Arrangements
On 6 April 2016 the Autralian Taxation Office released its Practical Compliance Gudeline in respect of Limited Recourse Borrowing Arrangements, PCG 2016/5 the effect of which is that provided Self Managed Superannuation Funds are compliant by 30 June 2016 the ATO will not take compliance action against the trustee of the fund for the 2014/15 Financial year and prior.
In order for an LRBA to be complaint it must essentially provide for arrangements which are commercial in nature and would deliver a result comparable to commercial arm’s length dealing. The ATO will examine not only the interest rate but other terms of theloan such as the security provided and the term in order to determine whether a LRBA is compliant. PCG 2016/5 also sets out two safe harbour provisions when determining compliance for real property and shares. The safe harbour provisions are summarised in the table below:
Safe Harbour Requirements
|Asset Class||Loan Term||Interest Rate||Repayments||LVR||Security||Agreement||Guarantee|
|Real Property||Max. 15 years with a fixed rate term of max. 5 years||Min. 5.75% p.a in 2015/16 and RBA Indicator Lending Rate in May of the preceding year thereafter||Monthly repayments of Principal & Interest||Max. 70%||Registered Mortgage||Written & Executed Agreement Required||Personal Guarantee Not Required|
|Shares||Max. 7 years with a fixed rate term of max. 3 years||Min. 7.75% p.a in 2015/16 and RBA Indicator Lending Rate + 2% in May of the preceding year thereafter||Monthly repayments of Principal & Interest||Max. 50%||Registered Charge/Mortgage or similar security interest||Written & Executed Agreement Required||Personal Guarantee Not Required|
SMSFs have basically three options prior to 30 June 2016 in relation to LRBAs if they wish to avoid having to declare Non-Arm’s Length Income (NALI):
- Alter the terms of existing LRBAs to meet the guidelines set out in PCG 2016/5;
- Refinance the LRBA through a commercial lender
- Pay out the LRBA
Collectable & Personal Assets
The collectable & personal asset transition window is doe to close on 1 July 2016. Any Collectable & Personal assets acquired prior to 1 July 2011 should be disposed of by SMSFs by 30 June 2016 or be the subject of commercial leasing arrangements to unrelated third parties in order to avoid penalties.
Collectable & Personal Assets include:
- Motor Vehicles, Motor Cycles & Recreational Vessels;
- Rare folios, books or manuscripts;
- Coins and Banknotes where their value exceeds the face value and where they are traded at values above the spot price of the metal content in the case of coins;
- Wines & Spirits;
Arrangements for the leasing of Collectibles must include the following:
- The collectible or personal asset must be stored otehr than at the residence of a related party;
- Maintenance of written records as to the reason for the manner of storage of the asset;
- The colectible or Personal Asset must be insured in the name of the fund;
- The colectible or Personal Asset must be independently valued by an appropriately qualified valuer
Penalties will be imposed on funds failing to comply after the transition window closes so the time to act is now.
If you consider the subject matterof this article affects you or your Self Managed Superannuation Fund then contact our Marek Reardon to discuss the matter further.