SMSF related-party borrowing arrangements
Will a borrowing arrangement by a SMSF pass the smell test?
The Australian Taxation Office (ATO) has issued a taxation determination concerning non-arm’s length income (NALI) of a self managed super fund (SMSF) when the parties to a scheme have entered into a limited recourse borrowing arrangement (LRBA) on terms which are not at arm’s length. If you fail this smell test the tax rate becomes 47%.
The ATO has also updated a practical compliance guideline which sets out the Commissioner’s “safe harbour” terms for LRBAs. If an LRBA is structured in accordance with the guideline, the ATO will accept that the LRBA is consistent with an arm’s length dealing and the NALI provisions (47% tax) will not apply.
Trustees who do not meet the safe harbour terms will need to otherwise demonstrate that their LRBA was entered into and maintained consistent with arm’s length terms.