The Australian Taxation Office (ATO) has released Taxation Determination TD 2016/16 which provides further guidance on its view as to the application of the non-arm’s length income (NALI) rules to non-commercial limited recourse borrowing arrangement (LRBA) loans from related parties to the trustees of self managed superannuation funds (SMSFs). TD 2016/16 replaces the ATO’s previous ATOIDs on this issue, namely ATOID 2015/27 and ATOID 2015/28, both of which have been withdrawn.
In TD 2016/16 the ATO reiterates, and provides more information on, its position on the application of NALI in such situations. Interesting comments made in the determination include:
- Like previous ATO examples, the example in the determination of a non-arm’s length arrangement is on the extreme edge of such arrangements (eg nil interest, 100% loan to value ratio and repayable at the end of the 25 year term) – no further guidance is given on arrangements that are “close” to being arm’s length
- The obligation to determine a hypothetical borrowing arrangement in which to test the related party loan against (this sounds like a Part IVA counterfactual)
- The obligation to test whether the SMSF trustee would have and could have entered into the hypothetical arrangement
- Factors as to whether the SMSF trustee could have entered into the hypothetical arrangement include whether the SMSF has sufficient capital, liquidity and cash flow to enter into such arrangement
- Factors as to whether the SMSF trustee would have entered into the hypothetical arrangement include whether the arrangement would be consistent with the SMSF’s investment strategy, be an optimal use of the SMSF’s funds and be expected to make a return for the SMSF
These last points, in particular, are a new (and not a particularly welcome) development by the ATO as they step into the realms of whether the investment is appropriate or not. This is an area that is traditionally not regulated by the ATO (as investment choice is a matter for SMSF trustees provided such investments are within the rules).
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