A specialist legal firm has warned that ATO private binding rulings with regard to the terms of a related-party loan to an SMSF may not offer infinite protection from falling foul of the non-arm’s-length income (NALI) rules.
“When the related-party loans began happening a number of years ago, a number of people went and got private rulings [to have their individual loan terms ratified by the ATO]. But if you get a private binding ruling, then you will find it only applies to certain years and the ATO will not usually give you one more than a couple of years after you get the ruling,” Cooper Grace Ward partner Scott Hay-Bartlem said during the firm’s recent SMSF conference.
“So while people keep saying we got a private ruling, that’s great, but when did it expire or has it expired? Because if it has expired, you may need to look at rejigging the arrangement.”
In the same conference session, Cooper Grace Ward partner Clinton Jackson pointed out the difficulty SMSF trustees face to gather sufficient evidence a related-party loan has been established on arm’s-length terms when the prescribed safe harbour conditions have not been followed.
“What we find is when people go get that evidence from banks, they’re not getting detailed enough evidence if they’re not relying on safe harbours,” Jackson said.
“The evidence that you need for a related-party loan relying on that bank evidence is quite extraordinary. You need quite a lot of it and the detail you need to go to is much more than what we see in most transactions.”
He described the situation as an extremely high-risk area for SMSFs with these types of borrowing arrangements.
Recently, the legal firm also highlighted how the actions outside an SMSF but related to it can create NALI problems for the fund when it highlighted a recent case before the Administrative Appeals Tribunal.
