There has been controversy over the impact of low or no interest related party loans to self-managed superannuation funds (SMSFs) since the release last year of the ATO’s view that these loans can result in non-arm’s length income for SMSFs (see ATO IDs 2014/39 and 2014/40 and our previous legal alerts on this issue: SMSFs and LRBAs: ATO finally clarifies its position on zero interest loans from related parties and non-arm’s length income; Limited recourse borrowing arrangements: SMSFs watch out! ATO changes its view on non-arm’s length income).
But what that practically meant for pre-existing arrangements has not been clear until now.
The ATO has confirmed, in a speech at the AMP ‘SMSF In Practice’ conference on 20 October 2015, that it will allow a grace period to allow SMSFs to rectify existing interest-free, low rate or uncommercial loans from related parties before 30 June 2016. In particular, they said:
… the commissioner will not allocate resources to undertaking any compliance activities or actions in relation to those arrangements provided commercial terms are in place by 30 June 2016. This timeframe is intended to allow funds sufficient time to further consider their particular circumstances and arrangements and, if necessary, to restructure arrangements on commercial terms without detriment.
If your clients have loans to SMSFs that are interest-free, low rate or include other terms that are not commercial, make sure you take action to place the arrangement on arm’s length terms before 30 June 2016. This is more than just the interest rate – the ATO’s view applies to the arrangement as a whole, including documentation, LVRs, security and repayment terms. Even where there is an existing private binding ruling (PBR), make sure the actual circumstances are identical to those in the ruling, or the protection of the PBR may not be available. Also, check the years to which the PBR applies –ATO private rulings will usually only apply for specified financial years.
Also, given the ATO’s renewed focus on this area, it is essential that clients are complying with the terms of the loan.