In late 2014, the ATO released two interpretative decisions which indicate that borrowings on non-commercial terms can cause non-arm’s length income.
SMSF trustees are expected to have these arrangements on commercial terms by 30 June 2016, the ATO announced in late October last year.
Cooper Grace Ward Lawyers partner Scott Hay-Bartlem said some SMSF trustees have been overly fixated on getting the loan’s interest rate on commercial terms, and ignoring other key details.
“In our experience, it’s not just the market interest rate the ATO is concerned about, but also things like the security that has been taken – is it the same sort of security that an arm’s-length bank would take?” he said.
“And the principal payments, are they the sort of principal payments that an arm’s-length lender would require?”
Putting loan agreements in place is also essential, Mr Hay-Bartlem said.
“I’ve never had the bank not want the loan agreement, and people don’t often put the effort in of getting documents done. So if you haven’t got a written loan agreement, the bank wouldn’t lend to you. Also, how can you establish what the terms are?” he said.
Mr Hay-Bartlem also stressed the importance of registering a mortgage, as would be done with a bank.
“The ATO has given us a time period to get this fixed. So everyone should be looking at their related-party LRBA loans and making sure it’s not just the interest rate that is right, but that all the terms are met,” he said.
Shirley Schaefer, superannuation partner with accounting and advisory network BDO, also noted the ATO is likely to be keeping a close eye on whether these loan structures are compliant.
“Once the 2016 returns start being lodged, they might start data filtering on the LRBA information and doing some data analytics around loan and interest rates at the very least,” she said.