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COVID-19: Loan Repayment Relief

Overview

Temporary loan repayment relief may be offered in relation to an existing limited recourse borrowing arrangement (LRBA) between an SMSF and a related party due to the financial effects of COVID-19.  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 Non-Arm's Length Income (NALI) provisions do not apply.  For example, these terms currently include temporary repayment deferrals for most businesses of up to 6 months, with unpaid interest being capitalised on the loan.  The following documents are now available to help you appropriately document the temporary relief arrangement:

  • Request Letter – From the fund "borrower" to the related party "lender" seeking repayment relief
  • Lender's Resolution - Approving the loan repayment relief
  • Confirmation Letter – From the lender to the fund "borrower" confirming the repayment relief

Downloadable Template 

You can download the template COVID-19: Loan Repayment Relief Template.docx. "by downloading this template you agree and understand the Disclaimer below".

Disclaimer

  • Any information expressed in the documents does not purport to be any financial, tax or legal advice as we have not taken into account any of your or your client’s financial or tax objectives that are specific to you or your client’s circumstances.
  • While effort has been taken to make sure the information is as accurate and relevant as possible, it is at best construed as general information only. These documents may not be suitable for all limited recourse borrowing arrangements. 
  • You should not rely on the information provided as advice, instead seek your own independent advice from appropriately qualified practitioners or conduct your own research.
  • As some of the merge fields are currently not available on NowInfinity, only refer to the above template as a reference and manually update the highlighted merge fields where necessary.  

 

FAQs

Question: 

My SMSF has a compliant limited recourse borrowing arrangement (LRBA) in place with a related party. Would the non-arm's length income (NALI) provisions apply if the related party offers repayment relief to the SMSF trustees because of COVID-19?

Answer:

ATO understands that temporary repayment relief may be offered in relation to an existing LRBA between an SMSF and a related party due to the financial effects of COVID-19.

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 do not apply. For example, these terms currently include temporary repayment deferrals for most businesses of up to 6 months, with unpaid interest being capitalised on the loan.

The parties to the arrangement must also document the change in terms of 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 catch up any outstanding principal and interest repayments as soon as possible.

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. 

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