ATO rulings targeting SMSF loans
The Australian Tax Office (ATO) appears to be targeting inappropriate loans to self managed super funds after a series of private binding rulings (PBR) have focused on those with uncommercial loan terms.
The funds borrowed money via limited recourse borrowing arrangements (LRBA) related party loans but were targeted because of uncommercial loan terms that returned more to the SMSF than what might be expected if the loan had come from an arm's length lender.
Townsends Business & Corporate Lawyers Principal Peter Townsend said SMSFs with the actions of the ATO ‘appear to have foreshadowed dire tax implications for such arrangements'.
He stated that SMSFs that have loan income considered a special income would be liable to a tax rate of 45 per cent on all rental income, dividends, interest and capital gains or losses that have been derived from the asset.
Townsend said that such loans would also flag to the ATO whether the trustees acted in the best interest of the SMSF members by entering into an inappropriate loan agreement.
The ATO has flagged a number of key features that may result in an LRBA related party loan being considered uncommercial and subject to the special income taxation according to Townsend.
He said the ATO would be looking at uncommercial loan to value ratio, unsecured loans, zero or below-market interest rates and unspecified or particularly lengthy loan periods.
Townsend stated the ATO has indicated it would take a wider view of a loan arrangement, particularly if used with other commercial terms, which may not result in the SMSF paying special income tax on the derived income.
However the ATO had not yet provided guidance on the way in which this view would be applied and seems at present to be determined on a case by case basis.
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