The ATO has published a fact sheet detailing its approach to treating income from assets purchased under a related-party loan as non-arm’s-length income, while at the same time warning SMSF trustees not to treat its latest interpretive decisions (ID) on the subject as definitive.
In December last year, the regulator issued ID 2014/49 and ID 2014/50, both of which classified income generated from an asset acquired as a result of a related-party loan incorporating a favourable interest rate as non-arm’s-length, resulting in a tax rate of 47 per cent being applied to that revenue.
However, in its fact sheet the ATO stipulated the decisions should not be regarded as an indication all income from assets purchased as a result of a related-party loan would be considered non-arm’s-length.
The situation appears to be causing SMSF trustees a fair amount of angst as the regulator has acknowledged receiving a growing number of private binding ruling requests on the subject.
In an effort to clarify the situation for SMSF trustees, the ATO has detailed the elements of a related-party loan it examines when deciding whether income generated by the asset under the borrowing agreement is arm’s-length.
Specifically, the loan characteristics scrutinised include the nature of the asset acquired, the amount borrowed, the term of the loan, the loan-to-value ratio, the interest rate charged or any other form of compensation paid to the lender for the opportunity cost involved, the frequency of repayments required, the security taken for the borrower’s performance under the loan, such as a personal guarantee, and the extent to which the loan terms have been followed.
Further, the ATO has advised trustees to retain all of the documents relating to the term of the loan.
