2016

SMSF Trustees who have established a limited Recourse Borrowing Arrangement(LRBA) with a loan from a related party should ensure the terms of the loan are made on an arms-length basis by 30 June 2016.

Where the terms of the loan and the ongoing operation of the loan are not consistent with an arms-length arrangement, the ATO is likely to determine that the asset gives rise to non arms-length income (NALI). NALI is taxed at the highest marginal rate – 47% for the 2015/16 financial year.

To determine if the arrangement is arms-length, the following factors must be considered:

Nature of the acquirable asset
Amount borrowed
Term of the loan
Loan-to-value ratio
Interest rate charge, or the other means by which the lender is compensated for the opportunity, cost in lending the principal
Regulatory and frequency of principal repayments required
Security taken for the borrowers’ performance under the loan, given the limited recourse nature of the loan
Extent to which the loan is operated in accordance with its terms
The ATO released two recent interpretive decisions (ATO ID 2015/27 and ATO ID 2015/28) where funds had related party lending and failed to satisfy the arms-length rule based on the facts of each case.

SMSF Trustees should review any LRBA to ensure that the terms are established and maintained on an arms-length basis. The ATO encourages Trustees to take steps to ensure the terms are consistent with an arms-length dealing by 30 June 2016 or to cease the LRBA at this point. Any new LRBAs must be established and maintained on an arms-length basis.

Implications for Clients

Trustees should be aware that related borrowing on less than commercial interest rates and/or terms may result in non arms-length income subject to penalty tax. A private binding ruling should be sought.
LRBA related party borrowing at commercial rates and terms is unlikely to generate non arms-length income.
Review existing related party borrowing arrangements to determine if they are impacted and identify any action required before 30 June 2016.

More About -- > David Watkins

David Watkins, has been providing advice to clients since 1987. He is a Certified Financial Planner, a member of the Financial Planning Association (FPA), and Superannuation Professionals Association of Australia (SPAA).Google Plus