Limited recourse borrowing arrangements (LRBAs) have become commonplace in self-managed super funds (SMSFs) in recent years, often involving SMSFs borrowing from related parties in order to fund acquisitions of properties and equities.
Such borrowings are permitted, provided they are maintained on arm's length terms. Failure to ensure arm's length terms can result in the fund's income from the arrangement being taxed at the highest marginal tax rate (see our earlier article on the non-arm's length income provisions).
The ATO's recently released guidelines set out 'Safe Harbour' terms which — for the purpose of income tax assessment and compliance purposes — the Tax Commissioner will accept as satisfying the requirement that the LRBA be on arm's length terms.
The guidelines apply to SMSF trustees who have established LRBAs that meet the requirements of superannuation law. 
Safe Harbour 1 applies when an SMSF trustee uses an LRBA to acquire real property or to refinance a borrowing used to acquire real property. It applies whether that property is a residential or commercial premises. For the Safe Harbour to apply, the borrowing must reflect and be maintained on the following terms:
Safe Harbour 2 applies when an SMSF uses an LRBA to:
The Commissioner will accept the LRBA as being consistent with an arm's length dealing provided the terms of the borrowing are established and maintained throughout the LRBA on the following terms:
What about arrangements which do not reflect the Safe Harbour terms?
If the SMSF trustee has entered into an LRBA which does not satisfy the above 'Safe Harbour' terms set out in the guidelines, the trustee can have no assurance the Tax Commissioner will find the LRBA sufficient to avoid the non-arm's length income provisions. However, the guidelines make the point that failure to meet the safe harbour terms does not mean the LRBA is automatically deemed to not be on arm's length terms (as the guidelines are not laws, but rather the ATO's 'practical administration approach').
SMSF trustees and their advisors:
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.
You can read earlier ClearLaw articles on a range of topics.
 section 67A (or former subsection 67(4A) if applicable) of the Superannuation Industry (Supervision) Act 1993.
Leigh is a partner in the Maddocks Tax & Revenue team.
Leigh regularly provides advice on:
His advice covers both direct and indirect tax considerations.
Leigh advises Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.
The legal information and commentary on this site is general only. Documents ordered through Cleardocs affect the user's legal rights and liabilities. To assess their suitability for the user, legal accounting and financial advice must be obtained.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.