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ATO provides further guidance on SMSF related party arrangements

Posted on November 30, 2016 by admin

The ATO has provided further guidance regarding limited recourse borrowing arrangements (LRBAs) and when non-arm’s length income (NALI) rules apply to a related party LRBA.

The Tax Office recently released a Taxation Determination (TD 2016/16) and updated their Practical Compliance Guideline (PCG 2016/5/) to provide further clarification concerning the circumstances where a self-managed super fund with a related party LRBA would attract a higher marginal tax rate of 47 per cent under NALI provisions.

The ATO will continue to use the “safe harbour” terms for LRBAs set out in PCG 2016/15. The “safe habour” terms are designed as a safety net for SMSF trustees to ensure their LRBAs meet the guidelines.

Limited recourse borrowing arrangements (LRBAs) must be sustainable on normal commercial rates and structured in accordance with the ATO’s “safe harbour” guidelines to ensure the NALI provisions (47 per cent tax) do not apply.

Furthermore, the Tax Office will assess whether an arrangement was on arm’s length terms by assessing if the SMSF has derived more ordinary or statutory income under the scheme then it might be expected to derive if the parties had been dealing with each other on an arm’s length basis.

The ATO will assess what the terms of the borrowing arrangement may have been if the parties were dealing with each other at arm’s length (hypothetical borrowing arrangement). It is then necessary to establish whether it is reasonable to conclude that the SMSF could have and would have entered into the hypothetical borrowing arrangement.

If the SMSF could not have or would not have entered into the hypothetical borrowing arrangement, the SMSF will have derived more ordinary or statutory income under the scheme than under the hypothetical borrowing arrangement. In this instance, the ordinary or statutory income derived is NALI.

SMSF trustees have until 31 January 2017 to ensure they meet the “safe harbour” terms set out in the Practical Compliance Guideline (PCG 2016/15).

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Avoiding mortgage default

Posted on August 26, 2020 by admin

As individuals struggle with cash flow through the coronavirus, the Australian Bankers Association records that repayments on almost 500,000 mortgages have been deferred for six months. While repayments can be delayed, they cannot be avoided altogether.

Lenders can send you a default notice the day your repayment is overdue. However, they could also wait until your repayment is overdue by 90 or more days. When you receive a default notice, you are given 30 days to repay the amounts you have missed in addition to the regular repayment on your loan. Individuals who are struggling with their home loan repayments can avoid mortgage default by considering the following.

Contact your lender
Lenders are generally willing to work with you through financial hardship. Don’t be afraid to contact your lender to discuss your situation and find out what options are available for you. Lenders are often willing to negotiate short-term variations to repayment schedules that both parties can agree to. However, make sure that you do not agree to unrealistic repayment conditions that cannot be met.

Many Australian banks are offering a six-month deferral on mortgage repayments (including interest) for customers who are experiencing financial hardship as a result of COVID-19. If this is you, contact your bank to see if this is an option.

Apply for a hardship variation
Mortgage holders may be able to change the terms of their loan or temporarily pause or reduce their repayments under a hardship variation. A hardship variation can still be requested after you receive a mortgage default. To apply for one, contact your lender’s “hardship officer” and tell them that you wish to change your loan repayments due to financial hardship. This will usually require you to explain why you are struggling to make payments and to estimate how long your financial problems will continue to determine how much you can afford to repay.

After submitting a hardship variation request, your lender must contact you within 21 days with the outcome of your request. They may ask you for more details regarding your request; in this case, they must contact you again within 21 days from when you provide the additional information.

Consider selling your home
Selling your home is a tough decision, but in some cases this may be the better option if your circumstances are unlikely to improve. If you get to the point where your lender takes possession of your home and sells it, it’s likely that you won’t make as much as if you sold it yourself. When you sell your house on your own terms, chances are you will get a better price and avoid having to pay the legal fees passed on by your lender. Inform your lender if you decide to sell your home; they may ask for proof, such as a copy of the contract with your real estate agent or property advertisements.

Renting out your home until you can afford to make repayments again may also be an option if you are able to live somewhere else during this period.

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