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ATO NALI decisions on gearing questionable

The two ATO interpretive decisions (ID) released late last year dealing with the treatment of zero interest related-party loans to SMSFs are flawed, according to an industry expert.

ATO ID 2014/39 and ATO ID 2014/40 examined two specific situations involving related-party loans to SMSFs with zero interest charges and determined the income from the assets acquired through the borrowings was non-arm’s length.

However, NowInfinity principal Grant Abbott suggested the premise that the income and interest expense from those transactions flowed through the associated trust structure needed further scrutiny to determine its validity.

“In making the decisions the commissioner says in most instances there would be no income coming through the holding trust because the interest expense would wipe out the income from the trust,” Abbott said.

“But it’s impossible to actually execute this transaction in the manner the commissioner believes it should be carried out because it would be in breach of section 67A of the Superannuation Industry (Supervision) Act as, under this section, all the interest expense is always going to be recognised through the profit and loss statement of the SMSF.

“The income, however, will always come through the holding trust.”

Apart from that mismatch of revenue and expense through the holding trust, he pointed out the reasoning behind the IDs had greater implications for SMSFs that had limited recourse borrowing arrangements (LRBA) already in place.

“What the commissioner said, and this is the bizarre thing, is that all holding trusts under an LRBA are not bare trusts but fixed trusts,” he said.

“That’s dangerous because if he goes down that track, which I don’t think he’s thought of, it means that every LRBA we’ve all done is completely wrong.

“It means they would all be fixed trusts and we’d have to lodge tax returns for them and apply for an Australian business number and a tax file number for them.”

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