ATO rulings on low-interest loans reaching expiry, SMSFs warned
SMSF trustees who previously obtained private binding rulings from the ATO for related party borrowings on non-commercial terms have been warned to check what financial years they relate to as they may no longer apply, an industry lawyer warns.
Back in December 2014, the ATO issued the ATO ID 2014/39 and ATO ID 2014/40 confirming that nil interest borrowings from related parties can cause non-arm’s length income.
The ATO made it clear in these interpretive decisions that unless related party limited recourse borrowing arrangements (LRBAs) align with arm’s length terms and conditions, the income is likely to be taxed as non-arm’s length income.
In October 2015, the ATO announced that it would allow SMSFs until 30 June 2016 to bring these arrangements onto commercial terms, before undertaking compliance activities or actions in relation to those arrangements. The deadline was later extended to 31 January 2017.
The ATO also released Practical Compliance Guideline 2016/5, which set out the safe harbour terms on which SMSF trustees may structure their SMSF consistent with an arm’s length dealing.
Cooper Grace Ward Lawyers partner Scott Hay-Bartlem said that, following the ATO’s guidance on nil interest or low-interest loans and the potential NALI implications, a lot of SMSF trustees went and obtained private binding rulings from the ATO confirming they could continue to charge interest at a non-commercial rate.
Mr Hay-Bartlem said that SMSF clients with these rulings need to check what financial years the ruling relates to as it may no longer apply.
“The ATO will almost never give one [with a period] of more than a year or two away,” he told delegates at the Cooper Grace Ward Lawyers Annual Adviser Day and SMSF conference.
“So, if you’ve got a ruling that’s okay with a low-rate transaction with an expense of less than market value, does it still apply or are you outside the ruling period? You need to double-check on that.”
Mr Hay-Bartlem said that SMSFs should also be aware of the proposed amendments to the NALI provisions currently before the Senate, which will restructure section 295-550 of the Income Tax Assessment Act.
Under the amendments to the rules, even if income is on arm’s length terms, the income will still be NALI if the fund has incurred expenses which are less than the amount expected from an arm’s length dealing.
The ATO has also released draft guidance on the proposed provisions which helped to ease industry concerns about a potential conflict between the proposed new NALI rules and the rules concerning SMSF trustees charging for services under 17B of the SIS Act.
With the non-arm’s length income provisions contained in the same bill as the SG amnesty, there is strong doubt over whether the changes will be passed before the election.
However, SuperConcepts’ Peter Burgess previously predicted that regardless of which party wins the federal election, the NALI measures may still be reintroduced into the new Parliament because it is an integrity measure designed to ensure that the rules operate the way they were intended to work.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.