SMSF lending ruling not a model to adopt

SMSF AAT ATO Private lending NALI non-arm’s length income BPFN

The ATO has warned an Administrative Appeals Tribunal ruling regarding private lending in an SMSF should not be taken as a model to apply to other arrangements.

An Administrative Appeals Tribunal (AAT) decision that found an SMSF had engaged in non-arm’s-length dealings but did not earn non-arm’s-length income (NALI) should not be applied broadly to private lending arrangements within a fund, according to the ATO.

The regulator made the comments in a Decision Impact Statement released today in regards to the case of BPFN and Commissioner of Taxation (2023).

The case examined whether a corporate trustee SMSF that made a series of loans via a wholly owned unit trust to two other related entities then onto an unrelated third party for the purpose of property development breached the NALI rules.

In its ruling in July last year, the AAT stated the arrangements had not breached the rules as the income that returned to the SMSF was the same as if the parties had been dealing at arm’s length.

Commenting on the case today via the statement, the ATO pointed out that while the AAT ruled against it in regards to income returned to the fund, the tribunal’s view on the non-arm’s-length basis of the arrangement was consistent with its view under subsection 295-550(5) of the Income Tax Assessment Act 1997.

“The tribunal’s conclusion that the parties to the scheme in question were not dealing at arm’s length is also consistent with the ATO’s view of the scheme,” the ATO said, adding other SMSFs should not use the case as a precedent.

“While noting the tribunal’s conclusion that [the unit trust] JJUT (and presumably BPFN as sole unit holder) did not derive more income under this particular scheme based on the evidential findings made by the tribunal, we would question whether this decision can be extrapolated to arrangements involving private lending arrangements more broadly.

“When considering the application of subsections 295-550(1) or (5) to a scheme involving private lending arrangements, it is necessary in each case to consider whether the terms, rates of return and other remuneration of the parties dealing with each other in relation to each step of the scheme are consistent with that which arm’s-length parties bargaining in their own self-interest would expect.”

Prior to the ruling in the case, the ATO had warned SMSFs using special purpose vehicles for property developments would come under review due to concerns about violations of the NALI provisions.

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