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LRBA And Division 7A Loan Rules

LRBA And Division 7A Loan Rules

  • Saturday, 10 April 2021 16:40

The Australian Taxation Office (ATO) has provided some guidance on how it would approach situations where private companies have made loans to related SMSFs and where the loan is subject to a limited recourse borrowing arrangement and also a complying Division 7A loan agreement.

The ATO notes that temporary repayment relief might be offered in relation to existing loan arrangements due to the financial effects of COVID-19. The ATO has indicated that if the varied terms arising from the repayment relief reflect similar terms to what commercial banks are currently offering for real estate investment loans as a result of COVID-19 then the ATO will accept that the parties are dealing at arm’s length and the non-arm’s length income (NALI) provisions won’t generally apply. This will often involve unpaid interest being capitalised on the loan.

While the ATO notes that capitalising interest on the loan should not trigger direct Division 7A implications, this doesn’t count as a payment in determining whether the minimum yearly repayment has been met for Division 7A purposes. SMSFs in this position can apply for Division 7A administrative relief if they were unable to make minimum yearly repayments by the relevant due date.

The ATO also acknowledges that there is a view that interest cannot be capitalised on such loans given their Division 7A nature. Therefore, for the 2020 and 2021 income years, where an LRBA between an SMSF and a lender is subject to repayment relief but unpaid interest is not capitalised the ATO won’t take compliance action to determine if the NALI provisions apply as long as the following conditions are met:

  • The LRBA is also subject to a complying Division 7A loan agreement;
  • The SMSF has met its minimum yearly repayment or has applied for Division 7A administrative relief where it has been unable to meet the minimum yearly repayment;
  • The temporary repayment relief is due to the financial effects of COVID-19 on the SMSF; and
  • The repayment relief is otherwise on similar terms to that offered by commercial banks.


Interaction with Division 7A and administrative relief for minimum yearly repayments








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