If an SMSF has entered into a Limited Recourse Borrowing Arrangement with a related party, and is experiencing hardship with its repayments as a result of COVID-19, then the SMSF borrower may qualify for COVID-19 relief on its repayments. This article will explain why the arrangement needs to be documented for it to be compliant with super law, the evidence that needs to be retained and will outline the new Cleardocs SMSF Borrowing (COVID-19 Relief) product.Melissa Ramov, Maddocks Lawyers
Ordinarily, super law prohibits an SMSF from dealing with a related party lender on non-arm's length terms - the point of a Limited Recourse Borrowing Arrangement (LRBA) is that it is entered into on arm's length terms or in a manner which ensures the borrower enjoys terms and conditions which are no more favourable to them than one would expect if the parties were dealing at arm's length. Accordingly, other than in respect of COVID-19, a SMSF which is party to a loan with a related party lender on terms which offer repayment relief would ordinarily breach super law.
Notwithstanding the general position described above, the Australian Taxation Office (ATO) has acknowledged that an SMSF would be permitted to accept temporary relief in relation to an existing LRBA between the SMSF and a related party due to the financial effects of COVID-19.
The ATO has announced that it will consider that any relief between related parties will be regarded as arm's length dealings and that the non-arm's length income provisions will not apply if the relief is on similar terms to that offered by commercial banks, (e.g. no reduction in interest rates, no reduction in loan terms, relief on repayments up to 6 months or more if required, interest is capitalised on the loan amount.) The parties must document the arrangement and the reasons why the terms of the loan agreement have been changed.
This is a matter that requires self-assessment and is made by agreement between the related-party Lender and Borrower. However, evidence of the reasons why the relief is being granted must be provided by the Borrower to the Lender and needs to be ready to be produced to the ATO if ever requested in order to substantiate the reasons for relief being granted.
The ATO requires that the change in the terms of the loan agreement must be documented by the parties and the reasons why those terms have changed. The new Cleardocs SMSF Borrowing (COVID-19 Relief) product which includes a Deed of Variation to vary an existing loan agreement is an easy way to alter an existing LRBA to:
If the parties have already applied repayment relief but have not yet formally documented it - they will need to record it in writing as soon as possible. The Cleardocs SMSF Borrowing (COVID-19 Relief) product allows the parties to enter an effective date from which the repayment relief commenced. This allows parties to properly document the terms of the relief even where they have already started making reduced repayments.
For more information, please 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, including the following topics which you may find relevant:
Daniel is a Senior Associate in the Maddocks Tax & Revenue team.Daniel advises extensively in the following areas:
His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Daniel worked at a Big Four Chartered Accounting Firm focusing on tax consulting for mergers and acquisitions.
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