In October last year, the ATO confirmed it expects trustees to have these arrangements on commercial terms by 30 June this year.

The ATO formed a working group to discuss and provide guidance on what should be considered commercial terms, and this group has since proposed parameters to the ATO.

While the final safe harbour parameters are still a work in progress, SMSF Adviser understands the ATO clarified yesterday that loan repayments will be expected to be in line with commercial terms for all of this financial year.

“The ATO clarified […] that in order to be eligible for safe harbour, loan repayments need to be on commercial terms for all of 2015/16,” the head of technical services at Multiport, Philip LaGreca, told SMSF Adviser.

“What that means is if you’ve got a related party loan in place and the loan repayments you’ve been making are very low, then you are going to have to make some catch up loan repayments by 30 June this year in order to be eligible for safe harbour,” he said.

“So funds are going to need to ensure they’ve got sufficient liquidity to make those catch up payments by 30 June.”

This is an important clarification for SMSF practitioners, with some unaware of the need to go back 12 months from 30 June this year to make these arrangements compliant.

Speaking to SMSF Adviser yesterday, the ATO noted that in its online guidance, last updated on 1 December last year, it stated the Commissioner may allocate compliance resources to review an LRBA of an SMSF for the 2015-16 year or later years.

This follows a statement the ATO issued to SMSF Adviser in October 2015, stating:

“For some time now the ATO has flagged its concerns about LRBAs with related parties that are structured on non-commercial terms. However, the Commissioner recognises that the review and restructure of these types of arrangements can take time,” the ATO said.

“Therefore, the Commissioner will not allocate resources to undertaking any compliance activities or actions in relation to those arrangements provided commercial terms are in place by 30 June 2016. This timeframe is intended to allow funds sufficient time to further consider their particular circumstances and arrangements and, if necessary, to restructure arrangements on commercial terms without detriment.”

More to come.