There are few rules within the SMSF environment more punitive than those for operating on a non-arm’s length basis, making it even more important for SMSFs with related party loans to ensure they are utilising the correct interest rate.
According to David Busoli, principal at SMSF Alliance, now that the safe harbour provision interest rate for SMSFs with related party loans has been set for the 2025/26 year at 8.95 per cent for property and 10.95 per cent for listed equities, “it’s vital that these rates be applied against existing loans as applicable”.
“This is also a perfect opportunity to check if the current loan balance is equal to, or less than, what it should be if the safe harbour rules had been adhered to since inception,” Busoli explained.
“This is more than just a prudent idea, it’s vital, as if the balance is higher than it should be, the ATO could invoke NALI thereby making both the net income of the asset and its ultimate capital gains taxable at 45 per cent.”
Importantly, he added, this would still apply even if the fund is entirely in pension.
“The ATO is aware of those SMSFs with related party loans, so I expect it is just a matter of time before they are looked at a little more closely than some trustees might like,” Busoli said.
He added: “Rectifying an errant balance, or selling the asset now, does not guarantee compliance but it does make it less likely that NALI will be invoked.”
Additionally, a member’s pro-rata share of an outstanding related party loan is counted as an asset for total super balance purposes.
“This may have the effect of preventing a member form making a non-concessional contribution to pay out the loan – a classic circular argument – unless it’s refinanced through an arm’s length lender first,” Busoli added.
“Be careful though, this will not be a solution if the member’s benefit is unrestricted non-preserved as even arm’s length balances are included in the member’s total super balance under those conditions.”
However, he noted that this is one are that the proposed Division 296 tax on earnings balances above $3 million is “uncharacteristically reasonable”, with outstanding limited recourse borrowing balances being excluded from the total super balance calculation.
“If this measure proceeds, I wonder if this change would be applied to all total super balance counts or if we would have two different total super balance calculations depending on the context to which it is applied,” Busoli said.
