With the financial impacts of the COVID-19 pandemic increasing, many are looking for loan relief in an attempt to manage cashflow.
Self-Managed Superannuation Funds (SMSFs), with the ability to borrow using a limited recourse borrowing arrangement either through a bank or a related party, are certainly not exempt from this.
While they are required to consider liquidity and diversification in the fund's investment strategy, the current situation is difficult to have planned for. Currently, banks are offering relief to businesses and individuals, but there has been limited guidance for SMSFs with related-party loans.
Related party loan rules
SMSFs that have borrowed money from a related party must be careful to either comply with ATO Safe Harbour guidelines as to the terms of the loan, or provide specific evidence to support that the loan is an arms-length arrangement. This means that the loan must be on the same terms that an unrelated lender would offer.
What are the banks doing?
The major banks are offering a variety of relief for both business and personal customers including:
- Repayment Deferrals for between three and six months, with interest being capitalised
- Interest rate reductions of between 0.25% and 1% for variable-rate loans
- Early term deposit withdrawal fees waivers
What can Self-Managed Superannuation Funds do?
There hasn’t yet been guidance from the ATO to support what changes would be acceptable to a related party loan, but as long as the alterations meet the following, we believe there is a basis to support that the loan is still arms length.
- Ensure the changes are needed. The impact of COVID-19 is far-reaching, so for many financial difficulties, this will already be being felt.
- Ensure that the changes aren’t outside the bank’s current offerings. If they are, your auditor may ask for specific evidence to support why it is still arms length.
Bob & Judy have an SMSF owning a property that is currently leased for vacation rentals. They borrowed money from their family trust to be able to make the investment. Unfortunately with the restrictions on travel, bookings for their rental have dropped by 80% and they are worried about how long their SMSF cash will last to be able to pay their loan.
Bob & Judy have been specifically impacted by COVID-19 due to the reduction in bookings in their rental.
RSM has compiled a detailed list of current COVID-19 Australian Bank Assistance across a number of banks. We recommend that if your business and SMSF loan will be impacted by COVID-19 that you contact your local SMSF specialist or adviser to provide you guidance for your situation.