The Australian Taxation Office (ATO) has released a private binding ruling extract in which it found that a nil interest limited recourse borrowing arrangement (LRBA) loan triggered the non-arm’s length income rules. Rather than rely on section 295-550(1) ITAA97 (ie deriving income from a non-arm’s length scheme) the ATO has relied on section 295-550(5) (ie income derived through a fixed entitlement in a trust where the income is derived under a non-arm’s length scheme). Although it’s not clear from the extract, this may be a result of the use by that particular superannuation fund of a fixed “holding” trust rather than a bare “holding” trust.

In the ruling extract the ATO seems to have confused the derivation of income by the superannuation fund from the fixed holding trust (which is unchanged regardless of the interest rate the superannuation fund trustee has to pay) and the net income of the superannuation fund (which is affected by the interest). Even the case referred to in the extract (Allen v FTC) refers to income derived from the trust interest, not the net income position at the superannuation fund level.

We therefore believe that this view is unlikely to be supported by the Courts. In any event it would be prudent for superannuation fund trustees, in these types of arrangements, to pay a commercial interest rate to avoid an argument with the ATO (and superannuation fund auditors).

Phil Broderick
Principal
03 9611 0163
pbroderick@sladen.com.au