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So you think your related party LRBA loan is complying? Think again

On 6 April 2016 the ATO issued guidelines on limited recourse borrowing arrangements (LRBAs) between self-managed superannuation funds (SMSFs) and related parties.  PCG 2016/5 sets out the ATO’s views about when a loan from a related party to an SMSF will be treated as an arm’s length dealing.  If the LRBA is treated as a non-arm’s length dealing, the income from the investment may be treated as “non-arm’s length income” of the SMSF and be taxed at 47%.  The Guidelines identify the steps that you should take before 30 June 2016 to avoid ATO scrutiny.  

On 30 May 2016, the ATO announced that you will now have until 31 January 2017 to take action. Nevertheless, we recommend taking action sooner to properly plan for any required restructure, especially if the fund has arrangements similar to the ones described below.

Many LRBAs have been established where a person has borrowed money from a bank using the person’s home as security and then on-lent the borrowed money to the person’s SMSF on a “back-to-back basis”, so the loan from the individual to the SMSF mirrors the loan from the bank to the individual.

Although the loan from the bank to the individual is on commercial terms, the ATO guidelines mean that the loan from the individual to the SMSF may not be treated in the same way.  This is because:

  • Although in practice arrangements operate on a “back-to-back” basis, there may be nothing in the loan agreement that compels this to occur. 
  • Although the LRBAs usually provide that the SMSF may be required to provide security, this often does not occur.  
  • The commercial lender’s loan to the individual generally will have a lower interest rate than would be payable if the bank had made the loan directly to the SMSF.  This is because the loan to the individual is full recourse and is usually based on the “owner-occupier” interest rate whereas the loan to the SMSF is limited recourse and should be on the higher investment interest rate.

SMSFs that have LRBAs with related parties should review the arrangements now and restructure the arrangements before 31 January 2017 to:

  • Amend the loan agreement
  • Make additional “catch-up” payments, and
  • Register a mortgage over the SMSF’s property.

If you require help with reviewing and or potentially updating the terms of a loan agreement in a LRBA so that it comes within the scope of the Guidelines, please contact Thalia Dardamanis or Patrick Cussen on 1300 267 529.

By |May 31st, 2016|Uncategorised|0 Comments

Providing for a second spouse: How much is enough?

The contest between a deceased’s obligations to a second wife and his obligations towards adult children by his first wife is a familiar one.  Recently, in Thompson V Thompson the Victorian Supreme Court considered a claim against an estate by a second wife, aged 77 (widow).  

The facts: Jack Thompson (the deceased) died in 2013 aged 93.  His estate consisted of a half interest in a Collingwood apartment valued at $475,000, (his widow owning the other half) and gross assets of almost $200,000. The deceased left his widow some cash, chattels, a car and a simple non-portable life interest in the apartment. On her death his share of the apartment was to pass to his two adult children from his first marriage.  

The claim: The widow claimed full ownership of the apartment. She argued that a non-portable life interest was inadequate proper provision due to a lack of flexibility, absence of independence, lack of security, for example if funds are required for medical expenses or if more suitable housing is required, as well as the prospect for ongoing disputes with the executor.

The Defendant, being the executor and son of the deceased, agreed that a simple life interest was inadequate, but argued that any enlarged provision should be limited to giving the widow a ‘portable’ life interest in the Collingwood apartment with additional rights to use the proceeds of sale of the property for alternate accommodation such as a retirement village or nursing home.

The Court noted that during their long relationship, the widow and deceased maintained separate ownership of the apartment, both contributed to its purchase and that this was not uncommon in second marriages where both wished to preserve assets to be left to their respective families.   

The law: The Court noted that the normal duty of a testator, in traditional terms, is to provide a widow with security of a home, secure income and a fund for unforeseen contingencies.  A mere right to reside will usually be unsatisfactory where the widow can no longer live in the property.   This duty is seen as high in a long and happy marriage in the absence of competing claims.  

The decision: In the circumstances of this case, the Court held that further provision be made for the widow by way of providing for her an extended portable life interest in the Collingwood apartment.   This provided a more flexible arrangement for the widow, for example improved accommodation options and the right to earn income if the apartment is sold, while also preserving the deceased’s wishes that his financial interest in the apartment passes to his children on his widow’s death.  

A final note of caution is that every case turns on its own facts, but a good lesson from this case is that a simple “right to reside” for any spouse, is open to being challenged.  

We are experienced in providing strategies for blended families and their advisers – contact us for expert advice.   

By |March 11th, 2016|News|0 Comments

Changes in power of attorney legislation

Overview of changes

The Powers of Attorney Act 2014 (Vic) (the Act) came into effect on 1 September 2015. It attempts to consolidate and simplify old provisions that governed enduring powers of attorney and powers of guardianship.

Clients should note that if they have made a power of attorney or power of guardianship under the past scheme, these will not be invalidated. Also, the changes have no effect on medical powers of attorney under the Medical Treatment Act 1988 (Vic).

Enduring powers of attorney

What has changed?

Previously, enduring powers of attorney were executed for financial matters and powers of guardianship would encompass personal matters. There is now no need for two separate documents.  Should a person making a power of attorney (the principal) want different people acting for their personal and financial matters, this can also now be dealt with in the one enduring power of attorney document.

The ability for a principal to appoint more than one attorney is preserved. However, in addition to appointing attorneys jointly and/or severally, the changes enable a principal to appoint multiple attorneys on a ‘majority’ basis. Rather than acting either unanimously or alone, attorneys can make decisions if the majority agree. This is a suitable option for a person who wants to grant their attorneys (e.g. three children) more flexibility when acting.

Greater protection for vulnerable persons

The Act makes it clear that it is an offence for an attorney to dishonestly obtain a financial advantage or cause loss to the principal.  A principal can obtain compensation for a loss caused by the attorney through VCAT and the Act sets out new financial penalties for attorneys who have breached their duties.

Greater risk for persons acting as attorney

The Act imposes new obligations on attorneys and opens them to greater penalties.  It is essential an attorney understands that by accepting appointment they open themselves up to the risk of being sued.

It is common for family members to act as a person’s attorney – usually for no fee!  Often the attorney performs their role in a caring but not entirely professional manner.  For example, transactions may be entered into that benefit both the attorney and the principal (such as shopping) or proper account records might not be kept.  Under the Act, such actions may now give rise to significant penalties.

Creates the role of supportive attorneys

What is a supportive attorney?

The Act introduces the concept of a supportive attorney role. In the past, there have been no legislative provisions within Victoria that allowed for supportive attorneys.

The role of a supportive attorney is to provide assistance to those who require it during the decision making process. So, it would be appropriate for a person to appoint a supportive attorney if they suffer from impairments that affect their decision making capacity.

However, the role of supportive attorney is limited – they cannot make decisions on behalf of the principal.  Also, a care worker, health provider or accommodation provider for the principal cannot act as supportive attorney.

The lesson

Making a power of attorney is much more than down-loading a form.  Principals should be informed of the limitations and conditions they can include in the power of attorney.

Attorneys must be informed of and understand their obligations before accepting appointment and, once acting, put in place mechanisms to avoid or deal with any conflicts that may arise.

If you or your clients wish to execute a power of attorney document or have concerns about the actions of an attorney please contact our experienced team.


Bernie O’Sullivan
Stephen Hardy
Thalia Dardamanis
© Bernie O’Sullivan Lawyers

By |August 1st, 2015|News, Uncategorised|0 Comments