Interest-free or low rate loans to self-managed superannuation
fund (SMSFs) from related parties have been the flavour of the
month since the ATO's comments in the National Tax Liaison
Group meeting of December 2012. However, the ATO has now decided
that the non-arm's length income rules do apply in a number of
recent private rulings, including two we obtained for clients
(authorisation numbers 1012585947911, 1012595001544 and
This means where an SMSF has received an interest-free or low
rate loan from a related party, all the income from the LRBA will
be non-arm's length income and taxed at 45%. This penalty tax
rate applies even if the SMSF is in pension phase.
The ATO's primary reason in the rulings we have received is
that the SMSF would not have entered into the LRBA if they had to
pay commercial interest. As a result, the SMSF would not have
received any income from the LRBA in an arm's length
Based on the ATO's current view, no SMSF should enter into
an interest-free or low rate loan without first obtaining a private
If you have clients with interest-free or low rate loans to
their SMSF, you should consider the following:
Whether you should be reporting the income from the LRBA as
non-arm's length income to avoid interest and penalties.
Varying the terms of the loan agreement to require arm's
length interest is paid. You must ensure that this variation is
properly documented and the new interest rate is supported by
extrinsic evidence to show that it is commercial/arm's length
considering the other terms of the loan otherwise the client may
breach section 109 of the SIS Act.
You should also consider reviewing all SMSFs with related party
loans to ensure that the terms of those loans are consistent with
an arm's length arrangement. For example, if the interest rate
is lower than would be expected from an arm's length lender
(having regard to the loan-to-value ratio and repayment terms), the
ATO may apply the non-arm's length income rules.
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The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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