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?