LRBAs pegged as hotspot for ATO’s new data tools
With the majority of the 2016-17 annual returns now lodged, one audit firm expects the ATO will start ramping up its data-matching capabilities to ensure these loans comply with the new rules.
BDO national leader of superannuation Shirley Schaefer said now that most of the 2016-17 annual returns have been lodged, the ATO will be able to identify those funds that have related party borrowing arrangements in place and whether they’re on arm’s length terms or not.
Back in 2014, the ATO issued an interpretative decision which confirmed that unless related party limited recourse borrowing arrangements align with arm’s length terms and conditions, the income is likely to be taxed as non-arm’s length income (NALI).
It also confirmed that it expected all limited recourse borrowing arrangements to be on commercial terms by 30 June 2016.
It then released a practical compliance guideline in 2016 on what constituted commercial terms.
Ms Schaefer said the 2016-17 financial year was the first year that related party LRBAs had to be up to scratch with the requirements set out in ATO ID 2014/39 and ATO ID 2014/40.
“Now that all those tax returns have been lodged, you might find the ATO does a bit of data matching and undertake a few reviews [in this area],” said Ms Schaefer.
“If these arrangements are not on arm’s length terms, then the income from that arrangement could potentially be taxed as NALI,” said Ms Schaefer.
The tax return has to indicate whether it’s a related party borrowing so the ATO will be able to easily identify the funds it should be targeting in this area, she warned.