SMSF LRBA Borrowings from Related Parties

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.

 

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
  • Loan to value ratio
  • Term
  • Principal & Interest versus Interest Only
  • Interest only periods
  • Security (1st mortgage etc.)

Please note they may be additional factors to consider.

 

Can Superfund Wholesale 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.

We can assist with the documentation of a related party LRBA as well as loan amortisation schedules.  Additional fees do apply.

Please contact us if you would like more information or assistance with these strategies.

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