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ATO clarification could boost SMSFs

Andrew Yee  |  10 Jan 2013Text size  Decrease  Increase  |  

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Andrew Yee is a director with accountants and business and financial advisers HLB Mann Judd Sydney.


Comments from the Australian Taxation Office (ATO) have the potential to become a game changer for self-managed superannuation funds (SMSFs).

The clarification relates to the ability of SMSFs to borrow money. This has been allowed since 2007, as long as certain criteria are met.

The main ones are:

• the loan must be used for the purchase of a single acquirable asset;

• the asset must be held in a bare trust or holding trust; and

• the loan must be limited recourse, meaning the security rights of the lender are limited to the SMSF's geared asset.

In addition, any geared investment must provide for the member's retirement and also be authorised by the fund's trust deed and investment strategy.

The new view by the ATO is that:

1. A related party could lend to their SMSF at an interest rate that was below the market rate of interest - and perhaps interest-free; and

2. The amount of discount provided by the related party to the SMSF is not treated as a contribution to the SMSF by the related party.

These comments will no doubt attract the interest of anyone who has personal funds available to gear up or even "turbo charge" their SMSF by providing it with a low or no-interest loan.

Such loans are not treated as contributions and therefore not restricted by contribution caps.

The other major benefit of lending to an SMSF is that the money is invested in a low-tax environment because an SMSF only pays a maximum tax rate of 15 per cent on its income (including capital gains) or 0 per cent if the fund is paying a pension.

In addition, there is scope for the related party to forgive loan repayments of the SMSF at a suitable time and have the forgiven loan repayments treated as contributions to the fund.

Although the comments made by the ATO were made in the public domain, they do not carry the force of law nor are they binding on the ATO.

Anyone considering embarking on a low-interest or no-interest SMSF lending strategy should seek professional advice about structuring the arrangement, or even request a private ruling from the ATO.

Also, care must be taken to ensure the terms and conditions of a loan are made at arms length with a formal loan agreement in place.

If the loan is to be provided by a trust or company of the related party, then Division 7A of the Income Tax Act needs to be complied with, otherwise the loan could be deemed a dividend to the SMSF.