The Australian Taxation Office (ATO) has, on a number of
occasions, expressed the view that the non-arm's length
provisions of the Income Tax Assessment Act 1997 (Cth) (s
295-550) can apply when an SMSF trustee enters into or
maintains limited recourse borrowing arrangements (LRBAs) that are
inconsistent with an arm's length dealing. This view was set
out in ATO interpretative decisions ATO ID 2015/27 and
ATO ID 2015/28.
Until recently, there were various uncertainties around related
party LRBAs but we now know that related party LRBAs should be
fully reflective of arm's length terms, and those terms must be
complied with on an ongoing basis.
The ATO is now urging SMSF trustees to review any non-commercial
LRBAs and amend their loan terms in line with benchmark evidence.
However, this amnesty isn't open-ended so SMSF trustees will
need to get their house in order by 30 June, 2016.
We recommend that SMSF trustees promptly review any related
party LRBA to determine whether the terms of the loan are on the
same terms that would be agreed with an arm's length lender. In
practical terms, this means establishing whether a bank will lend
and on what terms they will lend, and gathering appropriate
evidence to support the terms of their arrangements. Suffice to
say, favourable loan terms such as 0% (or low interest), high loan
to security value ratios or unusual repayment terms are unlikely to
stand up to the ATO's scrutiny.
Although the ATO will not be dedicating compliance resources to
review a SMSF's LRBA until 1 July 2016, SMSF trustees would be
well advised not to sit on their laurels as they risk the
fund's income being taxed at the highest marginal rate of 47%
if a non-commercial LRBA is uncovered by the ATO in the
If you have any doubt about whether your fund's LRBA is on
arm's length terms, you should seek professional advice and if
necessary, adjust the terms of the loan (and continually monitor
compliance with those terms) to reflect an arm's length
arrangement, or perhaps take steps to refinance the loan by 30
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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ATO has released 2 draft fact sheets relating to the 2010 amendments to corporate law and tax in relation to dividends.
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