ATO’s announcement on Self-Managed Superannuation Funds borrowing from related parties

GUEST OBSERVER

On 6 April 2016 the ATO released a document relating to its view of what is “arms-length” terms when a self-managed superannuation fund (SMSF) borrows from a related party of the fund.   

The release of these guidelines is welcomed in that it provides details of the ATO’s current view of how these arrangements can be structured. Questions have been raised by the SMSF industry in relation to related party loans for a number of years, and this document will assist the industry with an indication of the ATO’s view.

The guidelines provide safe harbours for loan arrangements for the purchase of real property or stock exchange listed shares or units. In providing these guidelines the ATO has expressed the view in relation to the following components of the loan including - 

·        minimum interest rate to be charged; 

·        fixed or variable interest rate terms; 

·        the term of the loan; 

·        the maximum loan to value ratio; 

·        the security to be provided; 

·        the ability for personal guarantees to be provided; 

·        frequency of repayments; and 

·        the type of agreement required. 

In assessing compliance with the above, the ATO is taking a practical approach in allowing SMSF trustees until 30 June 2016 to get their affairs in order with any loans from related parties. 

As such, any SMSF that has borrowed from a related party of the fund should review the arrangements before 30 June 2016 to ascertain if there is any impact on their current borrowing arrangements.

The ATO has also stated in the guidelines that arrangements outside of the safe harbours may be acceptable. However, in the event of the ATO reviewing the arrangements the onus will be on the trustees to “demonstrate this by maintaining evidence that shows their particular arrangement is established and maintained on terms that replicate the terms of a commercial loan available in the same circumstances.” 

The key issue for SMSFs is to review their current arrangements to see if they fit within the safe harbour provided by the ATO.  If they don’t, they should review their ability to fit within the safe harbour or consider their options by either, documenting why the arrangement is commercial, refinancing or winding up the arrangement.

Brad Eppingstall is director, of RSM Australia and can be contacted here.