ATO releases guideline on SMSF related-party loans
On 6 April 2016, the ATO issued Practical Compliance Guideline 2016/5 (“Guideline”) setting out the Commissioner’s “safe harbour” terms on which SMSF trustees should structure limited recourse borrowing arrangements (“LRBA”), where the borrowing is provided by a related party.
If your LRBA arrangements for the 2014-15 and earlier years do not fall within the Commissioner's safe harbour terms, the Guideline sets out that you have between now and 31 January 2017 to either bring your arrangements within the safe harbour terms or to wind them up if you do not want to be audited in relation to the 2014-15 and earlier income years.
If a LRBA is not structured in accordance with the Guideline, the ATO may classify the income from the arrangement as non-arm’s length income, which is subject to tax at 47% instead of the normal super fund tax rate of 15%.
If you have LRBA arrangements in place that don't meet the ATO's safe harbour terms you should ensure they are reviewed prior to 31 January 2017 so that appropriate action can be taken.
What are the “safe harbour” terms?
The Guideline sets out the following terms on which a SMSF may structure their LRBAs so that the ATO will accept the LRBA as being an arm’s length dealing:
Click here to view table.
How long do I have?
The Guideline states that the ATO will not select an SMSF for a tax review for the 2014/15 year solely because of a LRBA arrangement. However, this is conditional on SMSF trustees:
- ensuring that the LRBA terms are consistent with the Guideline; or
- bringing the LRBA to an end by 31 January 2017.
Further, payments of principal and interest for the 2015/16 financial year must be made under LRBA terms consistent with an arm’s length dealing.
- Trustees may enter into a LRBA that is inconsistent with the Guidelines however, they must be able to demonstrate that the arrangement was entered into and maintained on terms consistent with an arm’s length dealing.
- If SMSF trustees cannot bring their arrangements within the Guidelines, the ATO suggest that they contact the ATO by 31 January 2017.