The Australian Taxation Office (ATO) will soon clarify its position over the validity and tax treatment of related-party limited recourse borrowing arrangements (LRBA) charging zero interest being used by SMSFs.
“Absolutely there will be some clarity [provided and] it’s not just going to be a private ruling, which is sort of what started this,” ATO SMSF regulatory and income tax products director Nathan Burgess said at last week’s SMSF Professionals’ Association of Australia (SPAA) State Technical Conference in Melbourne.
“We’re going to create a product, which will expand on our views, that you’ll be able to refer to.”
Burgess admitted the process had taken longer than expected due to the number of divergent opinions about the subject and the legal complexity associated with it.
“It’s taken just a little bit longer than we wanted mostly because we’re talking about multiple acts here, the income tax and regulatory legislation, and when we put eight lawyers in a room we got eight different opinions,” he said.
The ATO would release the product within the next six months, he said.
He emphasised it was not really the fact those types of loans had no interest charge that concerned the regulator.
“Everybody concentrates on the zero interest component, but it’s actually not commercial and that’s what we’re starting to call it,” he said.
“We’ve seen people enter arrangements where there will be interest [charged], but they’re not repaying it for the next 30 years at all, but we know they’re commercial loans where you don’t repay interest for a few years.
“So when we put something out, the clarification, it will just talk about the characteristic deeming these arrangements to be non-commercial.”
His comments come in response to concerns from the industry over recent ATO private binding rulings imposing tax liabilities on SMSFs with zero interest related-party loans on the basis that they generated non-arm’s-length income.
