SMSF trustees: Non-arm’s length LRBA grace period extended
The ATO had previously held that limited recourse borrowing arrangements (LRBAs) which are not maintained on arm’s length terms need to be fixed before June 30, 2016. Otherwise, this would give rise to non-arm’s length income (NALI).
However, additional time has been granted and now trustees have until January 31, 2017 to rearrange their LRBAs and either meet the safe harbour definition or otherwise demonstrate that the arrangement was entered into and continues to be maintained on terms consistent with an arms' length dealing.
LRBAs established not on commercial terms give rise to NALI, which is taxed at the top marginal individual tax rate, currently at 49%. This can really negate all the benefits of holding investments in a superannuation environment.
The ATO’s announcement of the deadline extension by an additional seven months mentions several requests from individual trustees to allow additional time to rearrange their affairs.
The ATO also acknowledged that the current guidance in relation to NALI from non-arm’s length LRBAs can be improved. In particular, there is scope for further practical guidance clarifying the circumstances in which an SMSF will be taken to receive a greater amount of ordinary or statutory income under a particular non-arm’s length arrangement, compared to the amount that it would have received under an arm’s length arrangement.
The ATO says it will not select an SMSF for an income tax review purely because it has an LRBA for the 2014-15 income years and prior, provided that:
- the SMSF trustee ensures that any LRBAs that their fund has is on terms consistent with an arm’s length dealing, or is alternatively brought to an end by January 31, 2017, and
- payments of principal and interest for the year ended June 30, 2016 must be made under LRBA terms consistent with an arm’s length dealing by January 31, 2017.
Contact this office if you need further assistance.