The ATO has issued a private binding ruling which provides information on potential tax implications that can occur with limited recourse borrowing arrangements in an SMSF.
The private ruling relates to an SMSF borrowing 100% of an asset’s value on an interest free, related party loan. In the circumstances set out in the ruling, it was found the parties were not dealing at arms length and as a result the fund would receive more income than would have been the case if they were dealing at arms length.
In that case the income was considered to be a non-arms length income, which means the fund has to pay tax in it at the rate of 45%.
The result was that the 100% loan to value ratio was not on commercial terms and therefore a substantially lower borrowed amount which would have occurred if it was on commercial terms might be expected to generate less income for the fund.
This is an important decision for SMSFs, the ATO previously said zero interest rate loans are not necessarily going to breach the rules, but this decision says it may result in the income being treated as non-arms length income, which may compromise the tax efficiency of the whole strategy.
The ATO warns that private binding rulings should not be used to predict ATO policy or decisions.
We recommend you consult with your financial advisor and legal advisor before entering into any limited recourse borrowing transaction.
If you require any advice on your loan or proposed purchase of property in an SMSF, please contact Anna Zdrilic at Matthews Folbigg on 9635 7966.
MatthewsFolbigg Lawyers, Parramatta, are the leading property lawyers in Western Sydney. Our expert team of property lawyers are able to advise on all areas of property law including leasing and strata.
DISCLAIMER: This article is provided to clients and readers for their general information and on a complimentary basis. It contains a brief summary only and should not be relied upon or used as definitive or complete statement of the relevant law.