ATO's new guidelines on related party loans to SMSF's
The ATO has recently released guidelines concerning related party loans. SMSF Trustees may need to take action to adjust borrowings in order to reflect the conditions set out in the new guidelines.
LOANS MUST BE ON AN ARM'S LENGTH BASIS
The ATO is concerned that some related party loans to SMSF's have not been conducted on an arm's length basis. They have announced that compliance activities will be undertaken on these types of arrangements during the 2016/17 financial year.
If the ATO determines that a related party loan in not on an arm's length basis, any income derived from the investment will be deemed non-arm's length income and will be assessed at the highest marginal rate.
The new guidelines issued by the ATO set out "safe harbour" conditions which, if satisfied, will support the presumption that the loan agreement is on an arm's length basis.
These guidelines include:
Minimum interest rates
Maximum loan terms
Maximum Loan-to-Value Ratios
Principal & Interest repayments
Registered Mortgage/Security Charge
Given the consequences of being deemed non-arm's length income, all SMSF Trustees with related party borrowings should consider:
Amending the terms of the current loan arrangement so that it falls within the "safe harbour" guidelines above;
Refinancing the loan with a bank;
Repaying the loan in full and bringing the LRBA to an end; or
Gathering evidence to demonstrate that the loan agreement is on a commercial basis. This would need to show that an unrelated party lender would be prepared to lend on the same terms as the related party loan.
Action must be taken now as the ATO has announced that the loan must comply by 30th June 2016.
Please contact KK Partners Group to discuss your situation if you think this may apply to you.