In April 2016 the ATO released PCG 2016/5, which outlined its
views on when loan terms would result in income from a related
party loan for an LRBA being non-arm's-length income (NALI) to
the SMSF (and taxed at top tax rates in the SMSF, rather than the
concessional tax rates that usually apply to SMSFs). It included
the safe harbour rules for the loan terms.
In September 2016 the ATO released TD 2016/16, which provides
some more clarification on its views about when the NALI rules will
apply to a related party LRBA. This replaces the ATO's comments
in ATO IDs 2015/27 and 2015/28.
The ATO now argues that if the SMSF could
not or would not have
entered into LRBA but for the related party loan on non-arm's
length terms, all of the income from the asset bought will be NALI
to the SMSF. This is an objective test and the determination sets
out a number of factors that the ATO will consider.
The ATO accepts that when the SMSF can objectively establish
that it could have and would have entered into the LRBA on
arm's length terms, then a comparison can be made between the
actual income from the arrangement and the income that the trustee
would have hypothetically received had it entered into an LRBA with
borrowings on arm's-length terms.
This means that where it can be established the LRBA is
sustainable on normal commercial terms, the ATO now accepts NALI
may not apply to the income received by the SMSF from the LRBA,
even though the related party loan is on non-arm's length terms
favourable to the SMSF. An example is where a related party loan is
being used to refinance an existing arm's length loan.
Care must still be taken when setting up a LRBA with a related
party loan or implementing or refinancing a related party loan. If
the loan terms do not comply with the safe harbour guidelines in
PCG 2016/5, clients should consider obtaining a private ruling to
ensure that the NALI provisions do not apply.
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Exemptions or concessions on stamp duty could apply when contemplating the purchase or transfer of NSW real estate.
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