It has come somewhat of a surprise to the industry regarding the Australian Taxation Office’s (ATO) view outlined in ATO ID 2010/162, which covers “limited recourse borrowing arrangements – borrowing from a related party on terms favourable to the SMSF”.
It has been a long-held view since the introduction of these arrangements on 24 September 2007, that the SMSF in its capacity to borrow money from a related party (i.e. a member) must be done on an “arms-length” basis, consistent with the requirements of section 109 of the SIS Act. This ATO ID however appears changed this view, whereby if a SMSF borrows money from a related party on ‘favourable terms’ and in accordance with the requirements of s.67A of the SIS Act, then this is not a breach of the arms-length dealings requirements outlined in section 109 (SIS Act).
The decision considers section 109(1)(b) of SIS, which deals specifically with circumstances where the other party to the transaction is not at arm’s length to the SMSF (e.g. a related party loan in accordance with s.67A). The provision requires that the terms and conditions of the transaction must not be more favourable to the other party than would be reasonably expected if the parties were at arm’s length.
On the basis that the arrangement is appropriately documented and conducted in a business-like manner, the ATO’s view in this interpretative decision confirms that there is no contravention of paragraph 109(1)(b) because the terms and conditions of the borrowing are not more favourable to the other party than would be reasonably expected if the parties were dealing with each other at arm’s length.
Whilst this provides some ‘good news’ for related-party limited recourse borrowing arrangements, it is important to consider that applying a 1% interest rate for your SMSF may still constitute any ‘difference’ as a contribution. This would be subject to the contribution caps and a member could end up with an excess contributions tax assessment.
What might appear to be a clever way to get more into super, could come back and bite you if the ATO (or fund auditor) take a strong view on such an amount being constituted as an “increase in the value of the member’s benefit”. You only need to look as far as TR2010/1 to consider the ATO’s views on what constitutes a contribution.
Click here to access ATO ID 2010/162.
I’d be interested to hear further comments and views on this decision…