Recent advice regarding Zero Interest LRBAs and SMSFs
Editor: Although the ATO originally indicated that LRBAs from related parties with non-commercial features, such as zero interest being charged, were “OK”, they changed this position last year.
In particular, two IDs released late last year (IDs 2014/39 and 40) basically state that any income derived from an asset acquired using an uncommercial LRBA will be non-arm’s length income and taxed at 47%.
In a recent meeting of the Superannuation Industry Relationship Network (involving the ATO and others in the industry), it has been reported that the ATO wants all SMSFs with non-commercial related party limited recourse borrowing arrangements (LRBAs) to put them on arm’s length terms as soon as possible, and by 1 July 2016 at the latest.
Ideally, this means that SMSFs that have borrowed from related parties on non-arm’s length terms should obtain evidence about what an arm’s length borrowing would involve, and then adjust the borrowing accordingly.
The ATO is apparently not dedicating active resources to ensure compliance with their view on non-arm’s length income before 1 July 2016, but if they come across SMSFs with uncommercial borrowings from related parties in the meantime, then the ATO will apply their view that the income will likely be non-arm’s length income and taxed at 47%.
The ATO stated that it is hoping to issue a public statement setting out the terms of this “amnesty” soon.
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