In late 2014 the ATO released two interpretive decisions which confirmed that income derived by an SMSF from limited recourse borrowing arrangements (LRBA) would be non-arm’s length income (taxed at 47%) where the loan was established and maintained under the terms inconsistent with an arm’s length dealing.
Some of the features of the non-arm’s length loans discussed in the ATO IDs included
- a nil interest rate
- a Loan to Value Ratio (LVR) of 80% – 100% without a personal guarantee or other security being provided
- a loan term of 20 years with the requirement to replay the loan capital at the end of the term as a single lump sum.
Where a SMSF with an existing related party LRBA established prior to the release of these ATO IDs, the ATO has urged trustees to review such arrangements to determine if they have been established and minted at arm’s length terms. Where that is not the case, the ATO has clarified that steps should be taken to put the arrangements on arm’s length terms by January 2017 (initially the ATO stated 1st July 2016 but then extended)
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Disclaimer and Warning
The information above is of a general nature only. It should not be used as a source to make financial decisions. It’s also important to note that the legislation and figures related to this topic tend to change regularly and therefore the information above may not reflect the current status. We recommend that if you are looking for advice on this matter, you should contact us.