ATO / Limited Recourse Borrowing Arrangements / Professionals / SMSF / SMSF Strategy

Zero interest in SMSF borrowing?

Whilst the interest in limited recourse borrowing within self-managed super funds appears to be rising, the opposite has been posed to the  Australian Taxation Office in respect to the level of interest than may be applied to a related party loan.

The June 2012 NTLG minutes posed the question as to whether a zero percent interest rate could be applied to related party loan in accordance with the provisions of section 67A of the SIS Act, which outlines the requirements of a limited recourse borrowing arrangement.  This question follows the ATO’s interpretative decision ATOID 2010/162 which confirms that a fund is dealing at “arm’s length” where the terms are more favourable to the SMSF.  What wasn’t outlined within the interpretative decision was whether the differential in ‘market rates’ versus a lower interest rate could constitute a contribution.

In an interesting outcome from this meeting, it is the views expressed by the ATO confirm that a zero percent interest rate can be established with a related party LRBA loan without the discrepancy between what is ‘commercial’ and the lower rate offered to the fund being classified as a contribution.  Consistent with the views express within SMSFR 2009/2, regarding the meaning of ‘borrow money’ or ‘maintaining a borrowing of money’, the most important element is that a genuine loan is in place (where it can be shown that there is an intention that the loan will subsequently be repaid to the lender).  Whilst a borrowing arrangement will usually involve an interest charge, the fact that no interest (or a lower interest rate) is charged will not, of itself, preclude the loan arrangement from being a borrowing.

It is important to remember that nothing within the borrowing exception of s67A of the SIS Act prescribes that a rate of interest must be applied in respect to the fund entering into a borrowing arrangement.

The release of this information by the ATO has already sparked the interest of many as a way to further improve ‘inflows’ into superannuation for many members who have been ‘capped out’.

What do you think about the ATO’s views expressed about SMSFs being able to provide 0% interest rate loans?



5 thoughts on “Zero interest in SMSF borrowing?

  1. What is the benefit of the SMSF getting a loan from someone? For instance, are you saying that an SMSF could borrow, say, $500 000 from either a member’s own personal bank account or from a relative/friend, place it (as a loan) in the SMSF bank account (say), then whatever interest that $500 000 earns, is only taxed at the super rate of 15% (or vitually zero tax if SMSF member is in transition to retirement or retirement)?

  2. Thanks Aaron.
    The key thing I believe that needs to be highlighted is that:

    “a genuine loan is in place (where it can be shown that there is an intention that the loan will subsequently be repaid to the lender)”

    In my opinion this means that regular principal repayments should be made (or regular, documented loan forgiveness taken as contributions), penalty interest levied for missing repayments, the loan should be formally prepared by a lawyer and executed correctly by both the trustee(s) of the SMSF and the lender and a mortgage registered against the title if the asset is real property.

    The 0% interest rate is absolutely sensational and will have a great impact on a number of my clients.

    As a side note, I have recently had to organise the amendment of a custodial / bare trust where a SMSF renegotiated their LRBA with Westpac. The terms of the loan (period and amount) were hard wired into the deed. This added an extra level of costs and lost time for the client. The bare trust deed was from a cheaper online provider organised by the clients previous accountant- not the typical good quality ones I utilise which should have only required trustee minutes to effect the change in the loan. Something to watch out for.

    Thanks again for the concise summary!

  3. Pingback: Related Party Loans for SMSF Property Purchases | EvolveMySuper

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