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SMSF deadline approaches for limited recourse borrowing arrangements

SMSF trustees have until 31 January 2017 to review their limited recourse borrowing arrangements (LRBAs) to ensure they are consistent with an arm’s length dealing, or alternatively brought to an end if they are not.

The Tax Office recently provided further guidance to SMSF trustees on when the non-arm’s length income (NALI) provisions apply to an SMSF’s LRBA in their Practical Compliance Guideline (PCG 2016/5) and Taxation Determination (TD 2016/16).

When determining whether the NALI provisions apply, SMSF trustees must recognise it is a two-step process. First, it needs to be determined whether:
1. The terms of the LRBA are consistent with the safe harbours in PCG 2016/5
2. The SMSF trustee can otherwise demonstrate that they are arm’s length.

If the borrowing arrangement is on arm’s length then SMSF trustees do not have to consider TD 2016/16 and the ATO will not apply the NALI provisions.

However, trustees with an LRBA on terms that are non-arm’s length will need to consider TD 2016/16. Trustees will need to consider the second limb of the NALI provisions and whether or not the income the fund obtains under the arrangement is greater than it would otherwise have been.

SMSF trustees should be aware that TD 2016/16 is not an alternative to the safe harbours set out in PCG 2016/5 and only applies if borrowing terms of an LRBA are non-arm’s length.

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Investing in shares vs property in SMSFs

March 19, 2020

Shares and property are two popular investment options for those with a self-managed super fund (SMSF). However, they both have very different attributes and choosing the one that will achieve the best outcome for an SMSF depends on your personal goals and situation.

While the price of shares can vary drastically, property is a relatively stable asset, making it appealing to those who want more security and predictability. Property prices are also negotiable unlike shares, and you can generally borrow money at a lower rate for property purchases.

It may seem hard to find the perfect investment property, but older and undercapitalised properties can be renovated for profit. However, returns from property rentals can be dented due to factors such as land tax, utilities and rates, maintenance and tenancy vacancies.

Shares are more dynamic and volatile than property. One advantage is the accessibility of investing in shares, as you can enter the share market with a few thousand dollars – much less than what you need to invest in a property.

Maintaining a portfolio of quality shares that pay tax-effective dividends may be a good way to fund retirement. With the right portfolio allocation, shares also have the potential to provide a better, stronger income than property rentals, as long as that income is sustainable and increasing.

Property can generally be used as a wealth-creation tool, while shares can create a reliable retirement income. For those who can afford to put more money into investments, it may be a good idea to consider investing and diversifying in both. If you’re unsure about which investment option is right for you, seeking financial advice may be the best option.