SMSF advisers needed to be mindful of the ATO’s position on what elements of limited recourse borrowing arrangement (LRBA) set-up costs were deductible, according to a specialist SMSF lawyer.
“Normally with a loan, borrowing costs are deductible over a period of the loan or five years, whichever is shorter, so in setting up an LRBA is the bare trust documentation, the registering trustee and those financial planning reports with the condition of the loan, deductible?” DBA Lawyers director Dan Butler told the DBA Network SMSF Strategy Seminar in Sydney this month.
“Generally, it’s not a black hole because super funds are generally not carrying on business, but [Income Tax Assessment Act (ITAA)] section 25-25 says you can deduct expenditure you incur for borrowing money to the extent that you use the money for the purpose of producing assessable income.”
DBA Lawyers wrote to the ATO to clarify its position as there was not enough guidance on the deduction of set-up costs, Butler said.
“Our starting point was that it should be deductible and the ATO came back and said that the costs for setting up the holding trust and a corporate trustee would not be a cost for borrowing money,” he said.
“The set-up costs are incurred for establishing the trust and are not for the establishment of the actual loan itself.
“So they’re sort of splitting hairs and saying that there is a divide there and [further, the ATO said] the costs are not directly incurred in taking out the loan and are not incurred as a condition imposed by the lender.”
He said the ATO believed the Superannuation Industry (Supervision) Act required the set up of a trust and it was not the borrowing itself that required the bare trust.
“That’s their analysis, which I can see legally,” he said.
“So the ATO continue to argue that it’s not directly incurred in taking out the loan and are not incurred as a condition imposed by the lender.”
However, he said he did not know how much weight could be placed on that as certain banks did impose a financial planning statement of advice as a condition of their borrowing.
“So I think there is some argument that your financial planning opinion could be deducted as a borrowing cost under this provision, though this [response from the ATO] was only a letter and it’s not a binding letter, but at least it’s showing you the divide that the ATO may take,” he said.
“When we do an LRBA, we put in an extensive loan agreement so a lot of our costs for the LRBA is for the loan agreement, but strictly speaking based on what the ATO said, we would have to pro-rate our invoice for you such that the loan agreement component and certain resolutions are deductible but the bare trust and some of the other parts are not deductible.
“I just want to alert you to that because I think it’s worthwhile to note and also I think a lot of people are probably not even claiming the borrowing costs, so I think that’s the more pertinent point – it’s a black hole, but it’s not an [ITAA] division 48 black hole.”
