Update issued on SMSFs and non-commercial loans

The SMSF Professionals' Association of Australia (SPAA) has issued a progress report on the ATO’s stance on limited recourse borrowing arrangements (LRBAs) involving non-commercial loans.

The Superannuation Industry Relationship Network (SIRN) met in mid-November to discuss two draft ATO Interpretive Decisions (ATOIDs) on the application of section 295-550 of the Income Tax Assessment Act 1997 (the NALI provision) with respect to non-commercial LRBAs.

This follows months of speculation after the ATO issued a private binding ruling earlier this year which illustrated the significant tax implications that can potentially occur with SMSFs and loans made on non-commercial terms.

As a result of the November meeting, the ATO has agreed to look into issuing further guidance in addition to the ATOIDs on the factors that should be considered in determining whether a loan may be non-commercial for purposes of an LRBA.

“At this stage income received by a superannuation fund from an LRBA which involves a non-commercial loan is likely to be treated by the ATO as non-arm's length income of the fund and taxed at 45 per cent up to the 2013/2014 financial year or 47 per cent for the 2014/2015 financial year,” SPAA stated in an explanatory note.

“The ATO's argument in treating the income received from the LRBA is that the income received from the holding trust arrangement (also referred to as a bare trust) in which the single acquirable asset is held, is greater than the amount the fund would have received due to the arrangement which includes the borrowing made by the fund which has a 0 per cent rate.

“The distribution of income from the holding trust is considered by the commissioner to be income in terms of section 97 of the Income Tax Assessment Act 1936.”

Speaking to SMSF Adviser, SPAA’s director, technical and professional standards, Graeme Colley said while these ATOIDs were originally due to be publically released before the end of the year, it’s more likely they’ll be issued in early 2015.

Mr Colley also said SPAA would like to see further guidance on the specific features the ATO looks at when determining whether a loan is considered to be on commercial terms.

If practitioners have any doubts as to whether they think income received by a particular fund from an LBRA could be taxed as NALI, they may like to seek a private binding ruling from the commissioner, SPAA advised.

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