ATO releases new tax determination on LRBAs

The tax office has this afternoon released a taxation determination dealing with LRBAs and non-arm’s length income, suggesting a shift in its position which could result in more flexibility for SMSFs.

TD 2016/16 will replace ATO ID 2015/27 and ATO ID 2015/28, and the full document can be accessed here.

It follows the release of the ATO’s practical compliance guideline (PCG), which set out the safe harbours as to when the tax office will accept that borrowing arrangements are on arm’s length terms.

The industry has since questioned the ATO about how the NALI provisions apply in circumstances where an arrangement isn’t on arm’s length terms, ATO deputy commissioner Kasey Macfarlane told SMSF Adviser.

“In a nutshell, the approach adopted in the taxation determination does actually mean that in some very limited circumstances, the NALI provisions may not apply to an arrangement even though it’s not on arm’s length terms,” Ms Macfarlane said.

“As is highlighted in the taxation determination, in the vast majority of cases, if there is an LRBA that is not an arm’s length terms, then NALI will arise, and the relevant income in the SMSF will be taxed at that marginal tax rate of 47 per cent, the highest marginal tax rate. So that is something to be avoided,” she said.

“The strong advice from the ATO is that to avoid any possibility of that particular income being taxed at the highest marginal rate of 47 per cent is that SMSF trustees should look to ensure that any LRBA that they enter into are on arm’s length terms, and that might either be in accordance with the safe harbours in the ATO’s PCG or in accordance with terms benchmarked against those offered by a commercial lender in the same circumstances.

“We will strongly advise trustees not to do anything other than that. However, if they are contemplating doing [otherwise] then our very strong advice is that they seek some independent advice or alternatively come to the ATO to get the advice confirmed in the form of a ruling.”

The release of this new taxation determination is in line with the ATOs promise to release further LRBA guidance by 30 September this year, ahead of the new deadline of 31 January 2017 to ensure borrowing arrangements are compliant. 

 

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