Wins and losses from the ATO

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Limited Recourse Borrowing Arrangements (“LRBA”) – wins and losses from the ATO

The ATO has recently provided Self Managed Superannuation Funds (“SMSF”) with a win and a loss in relation to LRBA arrangements.

The win came in the form of the Self Managed Superannuation Funds (Limited Recourse Borrowing Arrangements – In-house Asset Exclusion) Determination 2014. The determination helps overcome any risk associated with an asset held under a LRBA structure, which of necessity involves a trust in which the SMSF has an interest, being viewed as an in-house asset of the fund. The LRBA arrangement still needs to be structured correctly to take advantage of the determination.

The loss came in the form of a Private Binding Ruling regarding low or no interest loans from members to SMSF’s as part of a LRBA arrangement. In the ruling the ATO held that a low or no interest loan did not amount to a contribution. However, the ATO did find that the loan arrangement was a non-arm’s length transaction that would result in the fund receiving greater income from the asset purchase than it would otherwise receive, as a result of the reduced interest. As a consequence the ATO held that income that flowed from the asset is non-arms length income which would be taxed at the highest marginal rate rather than the funds concessional rate.

The challenge for accountants and auditors is how to deal with low or no interest loans in future. The private binding ruling is the ATO’s untested view on the issue and is only binding on the party who sought the ruling. However, private rulings are indicative of how the ATO views the law and are often followed by taxpayers in practice. The catch is, as happened recently in relation to its view on Division 7A and family law matters, the ATO is known to change its mind.

Interestingly, the ATO’s view in the above matters seems to be that it is willing to help those who are working within its interpretation of the rules, however, that it will if it can, find ways to defeat schemes that are not, in its opinion, within the spirit of the rules.

Brendan Cockerill is a Business and Succession Lawyer at DDCS Lawyers, 18 Kendall Lane, NewActon, Canberra ACT 2601 and can be contacted on (02) 6212 7600.