Australia: Certain Features Of Limited-Recourse Loans The Subject Of ATO Concern

Last Updated: 25 June 2008
Article by Jim Bulling

The ATO has issued a Taxpayer Alert TA 2008/5 specifying certain features of limited-recourse borrowing arrangements entered into by trustees of self managed superannuation fund that may give rise to taxation and superannuation regulatory issues.

These features include:

  • The charging of non-commercial interest rates, particularly where the lender is a related party of the fund.
  • The ATO considers that money advanced by a member at less than a commercial rate of interest could be characterised as a non-concessional contribution to the fund.
    Where the interest rate charged is greater than a commercial rate of interest, this may result in a breach of the sole purpose test or a breach of the prohibition against providing financial assistance to a member.
  • Capitalising interest on a borrowing.
  • The ATO considers that this may result in the arrangement failing to meet the borrowing exemption requirement that the money borrowed be applied for the acquisition of an asset.
  • A personal guarantee for a borrowing is given by a third party and in particular, a related party of the fund.
  • The ATO is concerned that if the right of indemnity under the guarantee is enforced against the trustee of the super fund, then this may result in recourse to assets of the fund other than the asset acquired (or any replacement asset) contrary to the borrowing exemption requirement that the loan be a limited recourse loan.
  • The asset acquired (or any replacement asset) is one the trustee is prohibited from acquiring under superannuation laws or the fund's governing rules.
  • This may arise where, for example, the trustee acquires residential property from a related party of the fund and the property does not constitute business real property.

The ATO has also released a questions and answers guide outlining its views on the application of the borrowing exemption. This can be accessed at:

Offsetting the superannuation guarantee charge liability

The Tax Laws Amendment (2008 Measures No, 2) Bill 2008 (Cth), which seeks to address the problem of double payment of superannuation guarantee (SG) contributions where an employer makes a late SG payment to the member's superannuation fund, was introduced into Parliament on 20 March 2008.

Currently, employers who make late payments of compulsory SG contributions to an employee's superannuation fund may be able to offset a payment made to the employee's fund within 28 days of the month following the cut-off date for making of SG payments against the employer's SG charge liability. The SG charge liability consists of the employer's total superannuation guarantee shortfall for all employees (excluding choice of fund liability where contributions are not made in accordance with an employee's request), the choice of superannuation fund liability, the nominal interest component and the administration component. Penalties and the general interest charge may also apply for late payment.

Under the current law, where an employer in error pays an SG shortfall after the 29 day relief period directly to the employee's super fund rather than to the ATO, the employer cannot offset the payment against the employer's SG charge liability to the ATO. Consequently, the employer is required to pay the full amount of the SG contribution again, in addition to the nominal interest charge, administrative component and any penalties to the ATO. Unless the employer is able to recover the contribution made to the fund, this will result in a windfall to the employee.

Under the proposed changes, an employer can elect to have a late contribution made to a employee's superannuation fund offset the employer's SG charge. The election must be by notice to the Commissioner and must be made within four years of the date the SG for the quarter became payable.

Employers will be able to elect to offset their SG charge liability by making payments directly to an employee's fund from the date of Royal Assent of the Bill. This includes making contributions in respect of SG charge liabilities that accrued prior to this date. Employers may also be able to make an application for amendment of a past assessment where the SG charge had been paid, provided that it occurred less than four years ago from the date the assessment was made.

Ordinary time earnings

From 1 July 2008 'ordinary time earnings' (OTE) will become the only earnings base that will apply for the purposes of calculating an employer's SG shortfall.

Currently, employers are required to make SG contributions calculated on an employee's 'notional earnings base'. Calculation of the notional earnings base will generally be ordinary time earnings, which is the total of earnings of an employee in respect of their ordinary hours of work, other than lump sum payments made on termination of employment for unused sick leave, annual leave or long service leave. Superannuation Guarantee Ruling SGR 94/4 outlines the ATO's view of what constitutes ordinary time earnings.

However, in some circumstances, such as where SG contributions are paid under certain industrial awards, a concessional notional earnings base may apply. The concessional notional earnings base may exclude certain employee benefits, for example, allowances, bonuses and commissions, that would otherwise be included in ordinary time earnings. Accordingly, where superannuation contributions are paid in accordance with an industrial award, employers will need to ensure that the minimum contributions are no less than 9% of the employee's ordinary time earnings.

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. Superannuation rules are always subject to change.

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