What items does the ATO look at when determining whether a limited recourse borrowing arrangement with a related party lender is at arms-length?
Arms-length is exactly that - the arrangement and conditions of the loan MUST mirror what an arms-length independent party would lend. This includes:
Interest rate (refer here to applicable safe harbour LRBA interest rates)
Loan to value ratio (maximum of 70% LVR)
Term (maximum of 15 years)
Principal & Interest versus Interest Only (loans must be principal & interest)
Interest only periods (maximum of 5 years)
Security (1st mortgage over title of property)
The following help article provides details on the terms of the safe harbour provisions: ATO Safe Harbour Provisions for Related Party LRBA Loans
Can Intello assist in documenting a member-financed / related party limited recourse loan agreement?
Yes - however we recommend that any SMSF trustees also seek independent legal advice or get in touch with Intello Legal.
Intello can assist with:
Establishment of the holding trustee company
Establishment of the bare trust / holding trust
Limited recourse borrowing agreement (loan agreement an ancillary documents) for the loan from the related party to the SMSF
Loan amortisation schedule
How to set up a holding trust for an LRBA
The establishment of an holding trust (with or without a new trustee company) can be requested via the Intello Portal under Online Forms:
When ordering a a new bare trust / holding trust there is the option to select a Related Party Lender and enter relevant details:
Intello can use these details to prepare the necessary related party loan agreement (additional cost applies).
Applicable fees for setting up a new holding trust are here: Intello - SMSF Documents
Please also note that additional legal fees are applicable to register a mortgage over the title of the property held under the LRBA.
Holding Trust (Bare Trust) and Loan Agreement Examples
Example documents are available here:
Related Party Limited Recourse Loan Amortisation Schedule
You can download a template here:
FAQs on Related Party LRBAs
Is an SMSF allowed to borrow from a related party?
Yes.
From the ATO:
The law does not prohibit the lender from being a related party. However, SMSFs must continue to comply with other legislative requirements. For example, the SMSF must satisfy the sole purpose test and comply with existing investment restrictions such as those applying to in-house assets and prohibitions on acquiring certain assets from a related party of the fund.
Does interest on a borrowing from a related party need to be at commercial rates?
Yes.
From the ATO:
A trustee of an SMSF or its investment manager must ensure all investments are conducted on an arm's-length basis or, if the parties are not at arm's length, that the terms of the investment are no more favourable to the other party than they would be if the parties were dealing at arm's length.
Can a related party to the SMSF give a mortgage to the lender over an asset of the related party?
Yes.
From the ATO:
Yes, provided the related party or any other person has no rights of recourse against the SMSF trustee in the event that the mortgage is exercised by the lender (for example, if the SMSF trustee defaults on the borrowing), other than rights relating to the asset being acquired under the arrangement.
Please contact us if you would like more information or assistance with these strategies.