In 2016 the Australian Tax Office released Practical Compliance Guideline 2016/5 (view here https://www.ato.gov.au/law/view.htm?DocID=COG/PCG20165/NAT/ATO/00001).
The guidelines took effect on 31 January 2017.
These guidelines outline the terms on which a related party loan to an SMSF must be made in order to be afforded “safe harbour” by the ATO when determining whether an SMSF’s income is being acquired at arm’s length.
Areas requiring strict compliance include the loan term, interest rates, LVR and repayment frequencies. There is also a requirement for all related party loans to be secured by way of a registered mortgage or charge.
If a related party loan fails to meet all of the guideline criteria, income from the loan may be considered non arm’s length and therefore taxed at the highest marginal tax rate (47%) if the SMSF cannot otherwise show evidence that the arrangement is on commercial terms.
Which loans are affected?
The guidelines apply to BOTH pre January 2017 and future related party loans to SMSFs over any real property asset. Certain exchange traded assets are also affected.
Deadline for compliance
All affected loan agreements must comply with the ATO requirements from 31 January 2017 to gain the protection of the safe harbour.
How we can help
At Kells our experienced team can help you and your affected SMSFs:
- amend and document current loan arrangements to ensure compliance with the new guidelines;
- prepare, execute and register a mortgage or security against the affected property or asset; and
- where necessary, assist the SMSF in winding up the limited recourse borrowing including the transfer or sale of real property.
Please do not hesitate to contact Kells on +61 2 4221 9311 for more information