As part of the ATO’s response for SMSF trustees dealing with the coronavirus pandemic (COVID-19), it provided relief for funds with a compliant limited recourse borrowing arrangement (LRBA) that had a loan with a related party.
This COVID-19 relief essentially allows for a SMSF that was complying with the ‘safe harbour’ for real property in PCG 2016/5 to move outside the boundaries to obtain loan repayment relief as long as it reflects similar terms to what commercial banks are currently offering for real estate investment loans. In this instance, the ATO will accept that the parties are dealing at arm’s length and the NALI provisions will not apply. Specifically, we saw banks provide temporary repayment deferrals for most businesses up to 6 months, with unpaid interest being capitalised on the loan.
With parts of Australia (i.e. Melbourne) still working through the challenges of re-opening its economy due to COVID-19 and this six-month loan repayment deferral period fast approaching, the Australian Banking Association is now looking to implement a new phase of support in assisting their customers to get back to making their repayments. This next phase will see some customers now being required to restart paying their loans at the end of the six-month deferral period. For those still struggling due to reduced incomes and ongoing financial difficulties due to COVID-19, these people will be contacted towards the end of the deferral period to ensure that wherever possible they can return to repayments through a restructure or variation to their loan.
If these arrangements are not in place at the end of the six-month deferral, customers will be eligible for an extension for up to four months. This period will allow for the customer to work with their bank to find the best solution for them.
How it relates to SMSFs
Following the ATO’s previously published guidance in respect to providing loan relief, this updated ABA guidance provides an important framework for trustees and professionals to follow in supporting SMSFs that will continue to have issues in meeting loan repayments due to COVID-19.
It is important to note that a deferral extension of up to four months will not be automatic, rather provided only to those who genuinely need some extra time. For SMSFs, this is going to be important to evidence the decision to extend any loan relief as has been the case initially when the pandemic started to impact rents and the ability to repay loans.
Banks will be working with customers to find the best options to restructure or vary their loan, which may include:
- extending the length of the existing loan
- converting to interest only payment for a period of time
- consolidating debt
- any combination of these and other measures
Through this period it will allow for the lender and the SMSF (in this instance) to determine the most appropriate path forward.
It is expected that the ATO will update its SMSF FAQs page to reflect this extended position by the Australian Banking Association and contemplate how some of these negotiated measures continue to demonstrate that the arrangement will not be subject to the NALI provisions where it operates outside of the PCG 2016/5 ‘safe harbour’.
Smarter SMSF docs
Based upon this information, Smarter SMSF will be creating additional documentation to support trustees requiring an extension to their current loan repayment relief.
Please refer to the Smarter SMSF COVID-19 page for more information about the documents available to support professionals and trustees through this pandemic and recovery period.
Find out more about the phase two relief being offered by the banks here, https://www.ausbanking.org.au/banks-enter-phase-two-on-covid-19-deferred-loans/