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LRBA Safe Harbour Rules – Compulsory?

The ATO’s release of the PCG (Practical Compliance Guideline) 2016/5 outlines the safe harbour rules for SMSF related party limited recourse borrowing arrangements (LRBAs). These safe harbours detail the interest rates, debt-to-equity ratios and other terms that are required for the borrowing to be consistent with an arm’s length dealing.

SMSF trustees may have to structure their LRBA’s so that they are compliant with these terms otherwise it may give rise to the arrangement being considered non-arm’s length income (NALI). However, an LRBA isn’t obligated to abide by these safe harbour rules. It is still possible for an arrangement to be at arm’s length and not follow the provisions set out by PCG 2016/5. In this circumstance, the onus is placed on the trustees to prove that the borrowing arrangement they are engaged in, upholds terms that are consistent with an arm’s length dealing.

One way this can be achieved is by demonstrating that the terms of an arrangement replicates the terms of a commercial loan that is available in the same market conditions. If the trustees are unable to demonstrate this they are potentially faced with the arrangement being considered non-arm’s length.  


These safe harbour rules were in place as at 31 January 2017 and are set out below:

  • All LRBA’s must be consistent with the safe harbour rules or the trustees must be able prove the LRBA is an arm’s length dealing. LRBA’s that are unable to comply with these terms must cease (in order for the SMSF to avoid potentially paying the highest marginal tax rate on the non-arm’s length income).
  • The principal and interest payments made by the SMSF trustee are made under LRBA terms that are consistent with an arm’s length dealing. The table below outlines all the required terms of an arm’s length dealing as at 31 January 2017.

All these safe harbour rules are applied to the following two categories:

  1. The asset acquired is real property (including commercial and residential) and
  2. The asset acquired is a collection of stock exchange listed shares or units.

For other types of assets acquired by LRBA’s such as unlisted units, an SMSF is not required to follow any of these safe harbour rules but will need to distinctly demonstrate the LRBA is on arm’s length terms.

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