The Australian Taxation Office (ATO) has recently updated their questions & answers section on limited recourse borrowing arrangements (LRBA) where an SMSF has sought loan repayment relief to confirm that any adjustment to the loan to capitalise interest will not amount to a replacement of the existing LRBA loan contract.
Where temporary repayment relief has be offered in relation to an existing LRBA between an SMSF and a lender (which can be a related or unrelated party) due to the financial effects of COVID-19, the ATO has previously confirmed that if the repayment relief reflects similar terms to what commercial banks are currently offering for real estate investment loans as a result of COVID-19, the ATO will accept the parties are dealing at arm’s length and the NALI provisions will not apply. For example, banks have been providing terms that currently include temporary repayment deferrals for most businesses of up to 6 months, with unpaid interest being capitalised on the loan.
Documentation
It is commonly understood that the parties to the arrangement must document these changes in terms to the loan agreement and the reasons why those terms have changed. It is also expected that there is evidence that interest continues to accrue on the loan and that the SMSF trustee will repay any deferred principal and interest repayments in accordance with the varied terms. Where the loan is a related party loan that complies with the PCG 2016/5 safe harbour, the interest rate will need to reflect the reduction applied from 1 July 2020
Any further repayment relief needed due to the continued effects of COVID-19 should be reviewed at the end of the agreed deferral period and remain in line with what the commercial banks are offering at that time.
Variation of terms
Where the terms of the loan contract are varied to require interest to be capitalised on the loan and repayments to be made over an extended loan term as described above, the ATO will accept that these variations to the loan contract do not amount to a rescission or replacement of the original contract, or that there are fundamental changes to the character of the loan such that a new borrowing arises.
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