There has been mounting industry speculation over what the ATO considers to be a non-commercial loan since the issue of a ‘landmark’ private binding ruling that illustrated the potential tax implications of SMSF borrowing on a non-commercial basis.
The ATO’s director for SMSF regulatory and income tax products, Nathan Burgess, said those SMSF members looking for loans outside a regulated financial institution should be “very careful” with their arrangements.
“So for example, there was a large withdrawal from the account which is a personal payment to a trustee, and that didn’t get picked up in the audit, we’d be concerned about that,” he said.
“You should also be careful with the financial institutions, but you’ll find [regulated financial institutions] will greatly assist you in staying within the parameters,” he added.
The ATO noted there are several factors that it considers in determining whether a non-commercial LRBA exists, including whether periodic repayments are made rather than single lump-sum payments.
The loan to value ratio is also looked at, as is whether the lender has secured personal guarantees from members of the fund, and what mechanisms are present for the lender to protect the underlying value of the asset.
“A non-interest loan on its own won’t be enough to taint income of the fund as being non-arm’s length if derived from a related party investment through a limited recourse borrowing arrangement. But it is a considerable factor,” the ATO stated.
The ATO said it continues to receive PBRs involving zero interest rates and related parties.