SMSFs using a limited recourse borrowing arrangement (LRBAs) that have been privately funded have been given certainty they will not face negative tax outcomes where loan interest has been capitalised because of COVID-19, according to the SMSF Association (SMSFA).
Referring to a session presented by ATO SMSF auditors portfolio director Kellie Grant at the SMSFA National Conference 2021 last week, association deputy chief executive and policy and education director Peter Burgess noted Grant had announced the regulator’s stance when it came to LRBAs being fund via borrowings from a private company and he welcomed the certainty it would provide for SMSFs.
“It means, assuming all other conditions are satisfied, the option of capitalising interest in circumstances where the SMSF would be eligible for loan repayment relief under the COVID-19 relief measures will not cause the loan to be treated as a deemed unfranked dividend or the relevant income taxed as non-arm’s-length income,” Burgess said.
He added the SMSFA had previously pointed out an inconsistency that existed between the requirements that must be satisfied under Division 7A of the Income Tax Assessment Act 1936 for the loan not to be treated as a deemed dividend and the requirements of the ATO’s safe harbour provisions for the relevant income received by the fund not to be taxed as non-arm’s-length income.
“Although the safe harbour terms, and the associated COVID-19 relief measures, do permit the capitalisation of loan interest, it was unclear whether this would breach Division 7A and result in the SMSF having to treat the loan as a deemed unfranked dividend, which would then have adverse tax implications for the fund,” he said.
“The ATO has now confirmed, that assuming all other conditions are satisfied, this will not be the case.”
The SMSFA said conference attendees were also reminded that taxpayers must apply for administrative relief if they are unable to make the minimum yearly repayments on their Division 7A loans by the end of the lender’s 2019/20 income year.