SMSF trustees in non-bank limited recourse borrowing arrangements (LRBA) who are unable to repay their loan by the approaching 31 January deadline need to seek legal advice and should have already contacted the ATO to discuss their options.
“We have been assisting numerous clients in relation to what needs to be done to satisfy the criteria in PCG (Practical Compliance Guideline) 2016/5,” DBA Lawyers director Daniel Butler said yesterday.
“We have also received a number of queries from advisers concerned that their SMSF clients may not be able to fully rectify their non-arm’s-length (NALI) LRBAs by 31 January.
“Ideally, each SMSF trustee can easily prove that each non-bank LRBA is on arm’s-length terms.
“If an SMSF trustee is unable to meet the 31 January deadline, they should seek legal advice or consider contacting the ATO as soon as possible to discuss their options.”
The ATO’s PCG 2016/5, released in April 2016, addresses whether the tax office will give taxpayers a further opportunity to rectify the loan arrangement if they cannot satisfy PCG 2016/5 by 31 January.
“An important takeaway from the PCG 2016/5 FAQs is that if the LRBA is not rectified by the 31 January deadline, and the arrangement is not on arm’s-length terms, the NALI provisions will apply from the commencement of the arrangement, ie, not just from 1 July 2015,” Butler noted.
“The NALI provisions may result in all income generated from a non-arm’s-length arrangement, less certain deductions, being taxed at 47 per cent.
“The ATO may, however, be precluded from opening up an SMSF’s income tax assessment beyond a four-year period, or six years where Part IVA applies, unless fraud or evasion is alleged.”