The ATO has recently released a Private Binding Ruling (PBR) indicating that a related party loan to a SMSF at a 0% interest rate triggered significant tax problems.
The Limited Recourse Borrowing Arrangement (LRBA) in question was between a SMSF and a related family trust and included features such as 0% interest rate, 100% Loan-to-Value Ratio, an unspecified term, no personal guarantees and no regular payment plan, albeit a mortgage was granted over the asset.
The ATO ruled that the income derived by the SMSF would be more than the amount that it might have been expected to derive if the parties had been dealing with each other at arm’s length, and hence treated the income as non-arm’s length income taxed at a 45% tax rate.
Clearly the LRBA was at the “aggressive” end of the spectrum.
Interestingly, the ATO didn’t question the legitimacy of the loan nor did they suggest that loan didn’t comply with the superannuation (SIS) law. However, for the purposes of the tax law, the non-arm’s length income derived attracted a penalty tax rate of 45%.
In contrast, the ATO has previously released other PBRs stating that nil or low interest loans would not generate non-arm’s length income in certain cases and it has also made favourable public comments regarding contributions and arm’s length rule aspects of the law.
With the Government not expected to press ahead with its previously planned departmental review into limited recourse borrowings, the ATO’s recent activities might be seen as an attempt to curtail some aggressive arrangements, further emphasising the need for prudent management of related party loans.
Media Comment
Darren Kingdon
SISFA Director & Managing Director, Kingdon Financial Group
P: 07 3211 1132 F: 07 3211 9215 M 0411 432 882
E: darren@kingdonfinancialgroup.com.au
Who is Self-managed Independent Superannuation Funds Association (SISFA)?
SISFA is an association that has represented the interests of the self-managed superannuation fund (SMSF) sector for over a decade and is currently the only SMSF industry body solely representing all participants in the sector including administrators, accountants, auditors, lawyers, actuaries and advisers.