SMSF members can provide a guarantee for a unit trust loan related to property developments without breaching the non-arm’s-length income (NALI) rules, despite an ATO directive to the contrary, a specialist law firm has said.
ATO Regulatory Bulletin RB 2020/1 addresses a situation where two SMSFs invest in a unit trust that will undertake a property development using non-related-party gearing and members of each SMSF are required to provide a guarantee for the loan in question. The ATO stipulates these guarantees do not represent an arm’s-length arrangement and will subsequently be captured within the NALI rules.
“I personally don’t agree with this one,” Cooper Grace Ward partner Clinton Jackson said during his firm’s recent SMSF conference.
“At the end of the day if [the SMSF members] enter into the arrangement commercially, and this is a very common situation that we do see, [the members] are both in their respective funds getting a mutual benefit from the fact that [they are both providing a guarantee].
“The ATO says in their view that this is a breach of the [NALI] rules every day of the week, [but] I disagree with that.
“It would be a bit different if it was just [one SMSF member] giving the guarantee and [they] weren’t charging a fee for it.”
Jackson noted there is a course of action SMSF trustees can implement to prevent a breach of the NALI provisions in these situations.
“We often see, where guarantees are being provided by one party but not all parties in the arrangement, that an arm’s-length guarantee fee is charged and those items are fairly standard commercial practice across a lot of these types of arrangements,” he revealed.
He warned if trustees facing such a scenario do not put a guarantee fee in place, they will almost certainly face ATO scrutiny over whether a NALI arrangement is present in their funds.
