Urgent SMSF loan clarification required

As reported in SMSF Adviser last week, the ATO has issued a private binding ruling which relates to an SMSF borrowing 100 per cent of an asset’s value on an interest free, related-party loan.

“In the circumstances set out in the ruling, they [the ATO] believe the parties were not dealing at arm’s length, and as a result the fund would receive more income than would’ve been the case if they were dealing at arm’s length,” AMP SMSF’s Peter Burgess told SMSF Adviser.

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That income is considered to be non-arm’s length income, which means the fund has to pay tax on it at the rate of 45 per cent, he added.

Senior consulting lawyer at SMSF Law Shane Ellis told SMSF Adviser that in light of this private ruling, related-party loans are now at a crossroads.

“This private binding ruling has taken a counter position to a number of previous ATO [private binding rulings],” said Mr Ellis.

“The ATO needs to urgently clarify its position once more as it has clearly stated time and time again in the past that [related party loans] can be more favourable to an SMSF but not more favourable to a related-party lender.”

The SMSF Academy’s managing director Aaron Dunn said this private ruling is a “timely reminder” for SMSF trustees that the regulator will be paying close attention to these transactions moving forward.

“This is a clear realignment in thinking by the Commissioner, giving further regard to the growing number of requests being received,” Mr Dunn said.

An ATO spokesperson told SMSF Adviser that due to confidentiality provisions in the Tax Administration Act, the ATO cannot comment on particular private rulings.

The spokesperson also said private rulings are decided on the particular facts to which they relate.

The ATO warns that private binding rulings should not be used to predict ATO policy or decisions.