“If action has not been taken yet, it will need to be done without delay.”

He said any rental relief trustees of SMSFs provided to tenants during the COVID-19 period should also be reviewed to ensure any waivered amounts are being addressed and potentially repaid in accordance with any agreements incorporating the COVID-19 relief measures.

“With an increase in interest rates, coupled with a possibility of reinstating deferred loan repayments,, trustees may need to review their investment strategies with respect to cash flow requirements to ensure they can satisfy their liabilities when they fall due,” he said.

This re-evaluation and review should not just be for any COVID-19 relief measures, he warned, but for any borrowings.

“In the early days we saw all manner of terms and conditions when it came to such loans; from 100 per cent Loan to Value Ratios (LVR), to nil interest rates and a single principal repayment on maturity of the loan or sale of the underlying asset, which ever came first,” he said.

“Some of these terms and conditions were even sanctioned by the ATO in the form of private binding rulings (PBR).

“This free-for-all approach was never going to last and eventually the ATO looked to put a stop to it and issued Practical Compliance Guidelines 2016/5, a.k.a. PCG 2016/5 in early 2016. Subsequent updates occurred in late 2016 and then early 2022.”

Mr Cullen said these guidelines are now referred to as the ‘safe harbour provisions’ and set standard terms and conditions for arrangements not involving commercial lenders, that when adhered to, would result in the ATO taking the view the agreement is on an arm’s length basis.

“In most cases, these non-commercial lending arrangements were with related parties. There is no legal requirement to adhere to the guidelines. They remain just that, guidelines, not law,” he said.

“It is not to say that falling outside of the safe harbour terms and conditions would automatically result in a non-arm’s length arrangement, but the onus is then on the trustees of the SMSF to prove the loan is on commercial terms.”

Mr Cullen said simply replicating the basic terms you may find on a commercial lender’s website does not constitute replicating a commercial arrangement in the eyes of the ATO. Trustees must go through the process of applying for a loan and have the lender put an offer in front of them to know on what terms and conditions a third party would lend to them.

“If you can’t get an offer from a commercial lender, then it’s arguable you will not be able to lend to the fund on commercial terms outside of the safe harbour provisions,” he said.

“The argument being, if commercial lenders will not lend to you, that is the commercial reality of the situation and anything outside of that is not commercial.

“The complications associated with being able to prove commercial terms, generally leads people to the path of least resistance and comfort of the safe harbour provisions.”

To avoid for the 45 per cent tax impost associated with a NALI, an arrangement on commercial terms is important.

“The concept of non-arm’s length expenditure (NALE), that can lead to NALI, has been topical for a few years now,” he said.

“Many believe PCG 2016/5 dealt with the concerns the NALE provisions were trying to solve, but PCG 2016/5 only covers properties and listed shares/units.

“The ATO has stated the safe harbour provisions should not be relied upon for other assets such as unlisted shares, and it is the trustee’s responsibility to substantiate terms and conditions on other assets are commercial.”

As with any loan arrangement, interest rates have also impacted SMSF borrowings, he said, and for the 2023–24 financial year the safe harbour interest rate for property will be 8.85 per cent and 10.85 per cent for listed shares and units.

“Trustees will need to review their payment schedules and update them to incorporate the new rate from July 2023,” he said.

“For those with a fixed interest rate arrangement, they will need to check whether they remain at a lower rate within the fixed period or need to switch to variable rate going forward.”