Division 7A issues surfacing with COVID loan relief
An industry lawyer has highlighted some unresolved issues that could arise for SMSFs with related-party loans around overpaid loan interest where a commercial lender would have provided loan relief in the same circumstances but the loan must comply with Division 7A terms.
In response to COVID-19 and its related financial effects, the ATO made it clear earlier in the year that it would not take compliance action where a related-party lender provides repayment relief to an SMSF trustee due to COVID-19.
Cooper Grace Ward Lawyers partner Scott Hay-Bartlem said the ATO will not take action here as long as the relief aligns with what a commercial lender would provide an external third party.
“Here we are fortunate in that the banks are providing loan relief to borrowers, too. It’s important that if the related-party lender is going to provide a kind of relief to the super fund, that it aligns with what the banks are providing to external third-party borrowers. The relief that’s being given is the deferral of payments, but the interest continues to accrue,” he explained at the CGW Virtual SMSF Intensive Day.
“The borrower needs to prove they were impacted by COVID and the borrower must not terminate the lease or evict a tenant for arrears during the period.”
Mr Hay-Bartlem said the Australian Banking Association website has some good information about what’s acceptable.
The alternative to that, he said, is to provide evidence of what arm’s-length lenders are doing to substantiate the actions undertaken.
“We need to get written evidence of what an arm’s-length lender is doing in the same circumstances for its borrowers — it needs to be the same type of loan, security and risk. It’s important to align the type of loan evidence with the type of loan the super fund actually has,” he said.
“One interesting problem with all of this is Division 7A, because a lot of the LRBAs that we see are from companies and we need therefore to comply with Division 7A terms.”
There is no similar relief at this stage for Division 7A, he said.
“So, if you have a Division 7A loan, that is still going to require us to make the minimum repayment every year. It’s going to require us to charge that in line with the benchmark interest rate every year,” he said.
Mr Hay-Bartlem said this means that even if loan relief can be provided under the principles of the ABA rules, it’s not going to solve a Division 7A problem.
“So, even though we may be able to give loan relief on principle based on the ABA rules, that’s not going to solve a Division 7A problem. Now you can apply to the ATO if you want them to be nice to you because you haven’t complied with Division 7A and you’re actually going to have to do that if you want to give loan relief there,” he said.
“One interesting question that hasn’t been resolved yet is, what if you have to comply with Division 7A, but a bank would have given you relief in the same circumstances?
“In that case, you may have actually overpaid your loan interest to your related party which gives rise to some other interesting types of SMSF issues.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.