The latest sitting of the Superannuation Industry Relationship Network has resulted in industry representatives requesting, from the Australian Taxation Office (ATO), greater clarity and perhaps a legislative fix in relation to SMSFs taking out zero interest related-party loans.
The call comes as a result of a recent ATO private binding ruling (PBR) that examined a zero interest related-party loan from a non-arm’s-length income perspective as defined by section 295 to 550(5) of the Income Tax Assessment Act (ITAA).
The ruling has caused concern as it deemed the income of the SMSF derived from the assets purchased via the loan was non-arm’s-length and was subsequently taxed at the penalty rate of 45 per cent.
“The Income Tax Assessment Act says you can have non-arm’s-length income so long as there is not an advantage achieved by the entity and that’s pretty much what SIS (Superannuation Industry (Supervision) Act) says,” Institute of Chartered Accountants in Australia head of superannuation Liz Westover told selfmanagedsuper.
“SIS says you can have these non-arm’s-length arrangements so long as it doesn’t give some advantage to the fund.
“So are these arrangements non-arm’s-length? Yes, we’d have to agree they are non-arm’s-length, but do they offend the law? The general consensus within the industry is that no they don’t.
“Whether you like them or not is not really the issue. The issue is do they offend the law as it stands and is the tax office’s argument coming through in these PBRs valid?”
Westover said the regulator had indicated more PBRs were about to be released containing the same conclusion as the original that gave rise to industry concerns.
Basically, she said, the industry disagreed with one of the crucial premises that the SMSF in question would not have been able to secure a borrowing apart from a zero interest related-party loan.
“We’d argue that it’s a leap to say the fund would not have been able to get a loan had it not had the nil interest rate loan,” she said.
“Really the view is if we don’t want these arrangements in place, then we do need a legislative fix for it.”
She said the regulator had let the matter drift for too long and the sector was now looking to end the uncertainty of how the arrangements would be treated.
“There are people who are looking at these loans who want to comply with the law and do the right thing, but they’re just not sure what the tax office’s view is ultimately going to be on it,” she said.
While a solution or clarity around the issue was needed, she emphasised it had to be addressed in the right manner.
“Importantly, what they do come out with has to stand up technically and I think that’s what people were arguing for,” she said.
“If you don’t want these arrangements that’s fine, but you can’t say you don’t like them and then try to find a fix for it or try to find a way to say no to them.
“So most people are of the view that if we don’t want these arrangements, then there is going to have to be a legislative fix for it because the consensus view was they do not offend the law.”