Earlier this week, the Australian Taxation Office said it would not be taking action where an SMSF gives a tenant a temporary reduction for the 2019–20 and 2020–21 financial years as a result of the effects of COVID-19.
But according to DBA Lawyers director Daniel Butler and special counsel Bryce Figot, if an SMSF has borrowed money under an LRBA to finance the acquisition of a property, whether residential or business real property, a range of other implications may arise.
They said potential SISA contraventions may apply if a related-party lender does not act at arm’s length in relation to collecting all money owing under the LRBA as an arm’s-length lender would apply to a third-party lender.
However, Mr Butler and Mr Figot said a related-party lender would typically not consider taking any such action against the SMSF trustee given they are related.
“Again, appropriate arm’s-length evidence must be gathered and accounting and legal advice obtained to position against the significant penalties that may otherwise be applied,” they said.
Further, if there is a related-party lender, unless the “safe harbour” terms and conditions of the borrowing are consistent with the ATO’s criteria in PCG 2016/5, that are continuously complied with (e.g. regular monthly principal and interest repayments), Mr Butler and Mr Figot said the ATO has advised they will typically consider applying non-arm’s length income (NALI).
They point to an extract from PCG 2016/5 stating:
The trustees will need to be able to otherwise demonstrate that the arrangement was entered into and maintained on terms consistent with an arm’s-length dealing. One example of how a trustee may demonstrate this is by maintaining evidence that shows their particular arrangement is established and maintained on terms that replicate the terms of a commercial loan that is available in the same circumstances.
“Indeed, if the tenant reduces or stops paying rent, the SMSF’s ability to make repayments under the LRBA can easily fall into arrears and into default (with the default interest rate typically at least 2 per cent higher than normal) under the loan agreement, giving rise to a range of further ramifications,” Mr Butler and Mr Figot said.
“If the related-party lender provides any relief to the SMSF trustee that is not benchmarked to arm’s-length terms (that can be justified in these difficult times), based on recent ATO materials (including LCR 2019/D3), the ATO position is that NALI may then apply to any net income and net capital gain, if any, derived from that property for the entire future period of ownership.
“We would be pleased to advise and assist to minimise the potential future risk of NALI being applied.”
