In Part 1 of this article on the ATO’s Audit focus on SMSFs with LRBAs that don’t meet their Guideline for non-arms length dealing, we looked at the ATO’s position and why it’s important that your LRBA meets their requirements (this applies to SMSFs with ‘non-bank’ limited recourse borrowing arrangements).
Essentially, the ATO’s concern centres on NALI, or Non-Arm’s Length Income, which is taxed at three times the rate that SMSF income is normally taxed. The ATO itself suggests several ways to help SMSF trustees avoid needing to declare Non-Arm’s Length Income for the 2015/2016 financial year – as well as previous years.
ATO Guideline For SMSF trustees avoid needing to declare Non-Arm’s Length Income
1. Update the loan terms for your limited recourse borrowing arrangement. As you can imagine, there are a number of key factors which determine whether your arrangements meet the Guideline. If you’re at all unsure about your own situation, please contact SMSF Loan Experts as soon as possible.
2. Refinance your non-bank LRBA through a bank, or commercial lender. It’s important to note that this process would involve terminating the existing LRBA, which could attract additional fees and charges. At the same time, it’s possible you might be able to use this opportunity to gain better terms with your new LRBA.
3. Pay out and finalise the LRBA before 30 June 2016. This will involve the full payment of principal plus interest, and must meet the ATOs requirements for arms length dealing.
Remember from Part 1 of this article that Non-Arm’s length Income is taxed at 47%. As an SMSF trustee this will have significant impact on you if your non-bank LRBA wasn’t brought up to date before the 30th of June 2016.
If you’re already an SMSF Loans Expert client, you can rest assured that your arrangements are meet the ATOs requirements for SMSFs’ limited recourse borrowing. If you have an established SMSF and you’re at all uncertain about whether your LRBA meets the requirements, please contact us as soon as possible.