30 June 2020 year end audit areas of focus – Part 2

Temporary COVID-19 Relief | LRBA Loan repayment

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

Ordinarily, not paying market interest rates in an SMSF is usually a breach of superannuation laws. However, the ATO have provided guidance which allows SMSFs with an LRBA to negotiate a reduction in or waiver of interest payments because of the financial impacts of the COVID-19. If the repayment relief reflects similar terms to what commercial banks are currently offering for 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.

The parties to the arrangement must also document the change in terms to the loan agreement and the reasons why those terms have changed and it is also expected 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.

Some key requirements when dealing with loan repayment affected by COVID-19 include:

• The trustees will need to be able to demonstrate that the arrangement was entered into and maintained on terms consistent with an arm’s length dealing, for example, similar to what the commercial banks offer, such as interest and principal repayments on the loan can be deferred for up to six months & continue to accrue / capitalised during the deferral period.
• Ensure you have proper documentation which allows independent auditor to be satisfied – may take the form of a signed minutes, renewed loan agreements or amendment of the terms, with confirmation of the reason and clear relief arrangements with details.

Also note that if the related party lender provides any repayment relief to the SMSF trustee that is not benchmarked to arm’s length terms / can be justified in these difficult times, NALI may still apply.

What audit action / response is required?

The SMSF auditors are required to report contraventions to ATO if any of the below conditions are not satisfied:

• the relief has been offered due to the adverse financial impacts of COVID-19;

• appropriate documentation exists supporting the varied terms.