• Non arm's length limited recourse borrowing arrangements

    We have on a number of occasions expressed our view that the non arm’s length income (NALI) provisions can apply when an SMSF trustee undertakes limited recourse borrowing arrangements (LRBAs) established or maintained on terms that are not consistent with an arm’s length dealing. This view was set out in two ATO interpretative decisions.

    With the recent legislative amendments contained in Tax and Superannuation Laws Amendment (2015 Measures No.2) Act 2015, we have now issued two new ATO interpretative decisions ATO ID 2015/27 and ATO ID 2015/28. These new decisions maintain our view that the NALI provisions can apply where an LRBA is established or maintained on terms that are not consistent with an arm’s length dealing. NALI is currently taxed at 47%.

    See also:

    • ATO ID 2015/27 Income tax:  non arm’s length income – related party non-commercial limited recourse borrowing arrangement to acquire listed shares
    • ATO ID 2015/28 Income tax:  non arm’s length income – related party non-commercial limited recourse borrowing arrangement to acquire real property

    What you should do by 30 June 2016

    SMSF trustees should review any LRBA you have to determine whether it was established and maintained on terms that are consistent with an arm’s length dealing. If this is not the case, we strongly encourage you to take steps to ensure that it is on terms consistent with an arm’s length dealing by 30 June 2016 or to bring the LRBA to an end by that date. You may wish to seek professional advice if you are unsure.

    What we will do

    If we are asked to state formally (for example, in a private ruling or in litigation) whether a fund’s LRBA gives rise to NALI for any income year, our approach will be consistent with our view in the new ATO interpretative decisions.

    However, we will not be selecting an SMSF for review for the 2014–15 year or earlier years purely because the fund has entered into an LRBA.

    The Commissioner may allocate compliance resources to review an LRBA of an SMSF for the 2015–16 year or later years.

    We strongly encourage all SMSF trustees to take the actions suggested above in relation to your existing LRBAs before 30 June 2016. You should ensure that any new LRBAs you enter into are established and maintained on terms consistent with an arm’s length dealing.

      Last modified: 09 Nov 2016QC 47419