Hello Debbie
Thanks for the question.
Loan to Value ratio
The SIS Act and SIS Regulations do not specify a maximum Loan to Value ratio where an SMSF has entered into a Limited Recourse Borrowing Arrangement (LRBA).
Accordingly, if the lender is an arm’s length financial institution or an unrelated party, the Loan to Value ratio should not be problematic.
That said, if the lender is a related party to the members of the SMSF, to avoid the operation of the Non-Arm’s Length Income rules and to ensure that investment is considered to be on arm’s length basis (section 109 of the SIS Act) the Loan to Value ratio – and all other terms of the LRBA – need to be consistent with a borrowing from an arm’s length lender.
In Practical Compliance Guidelines PCG 2016/5 the ATO provides what it refers to as safe harbour terms for a related party LRBA that is used to purchase either real estate (commercial or residential) or listed equities.
Here is a link to PCG 2016/5:
In relation to a related party LRBA used to acquire real estate, the maximum Loan to Value ratio is 70%.
This does not necessarily mean that a related party LRBA cannot have a Loan to Value ratio of greater than 70%, but where this does occur, the trustee of the fund has no ability to rely upon the safe harbour guidelines and needs to demonstrate that the Loan to Value ratio from the related party lender is a term they could have obtained from an arm’s length lender.
Related party tenant
So long as the asset funded by the LRBA is business real property, it is possible for the tenant to be a member of the fund that is operating their sole trader business from the premises.  The lease agreement in place should be properly document, enforceable through legal proceedings, and the rent charged and other terms need to be strictly arm’s length/market value.
Best regards
The Auditors Institute