Does your SMSF's Borrowing require COVID-19 relief and should it be documented?
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. Arrangements need to be documented for it to be compliant with super law, the evidence that
needs to be retained is outlined using Cleardocs SMSF Borrowing (COVID-19 Relief) product.
Is an SMSF generally allowed to accept loan repayment relief from a related party lender? No.
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
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.
Is an SMSF allowed to do so in response to COVID-19? Yes.
Not with standing 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.
How do I know if I can qualify for COVID-19 repayment relief for my limited recourse borrowing arrangement?
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.
How should an SMSF document the COVID-19 relief?
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:
- record the temporary changes to a loan agreement (which reflect the above requirements of the ATO); and
- record the reasons why relief is being offered.
What if the SMSF is already making smaller repayments due to COVID-19?
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.