The ATO has revealed SMSFs will face a full evaluation, including their entire history, where incorrectly structured limited recourse borrowing arrangements (LRBA) are not rectified by the end of the financial year.
“The major risks with related-party transactions we’re concerned about really come down to things like LRBAs where the other party is related and there might be non-commercial arrangements there,” ATO SMSF risks and products director Nathan Burgess told the inaugural AMP SMSFs in Practice Day in Sydney last week.
“People are questioning us all the time – what is non-commercial? Sometimes it’s a little bit like looking at art, [you’ll know] when you see it.
“But the easiest [issues to recognise] is when we see 0 per cent interest rates and 20-year repayment schedules before the first repayment. We have seen it. I’m not making that up.”
The ATO issued two interpretive decisions, 2014/39 and 2014/40, in December last year that both deal with situations where an SMSF acquired assets via a zero interest loan.
Burgess revealed the ATO would replace them at some point.
“But the conclusion is that we’re going to draw the same thing, which is that it still needs to be commercial and if it’s not, you start to look at non-arm’s-length income,” he said.
“That’s where you start to look at 45 per cent tax rates, but I think it’s actually about 47 per cent now with the budget repair measure, so you don’t really want that.
“We’ll have more information on it, but what I can highlight today, because there has been some confusion over this area before, is that the ATO will be giving people until the end of this financial year to get their houses in order.
“But if you have a client in this situation that does not do that, then we’ll be looking at the whole arrangement and the whole history [of the SMSF].”
He said it was the first time the ATO had publicly stated the assessment and it would release further information, as well as transition arrangements.
AMP SMSF head of policy, technical and educational services Peter Burgess said around 40 per cent of reported contraventions appeared to be related-party transactions, such as in-house assets and loaning money to members.
“So it’s a very common contravention out there,” he said.