Trustee guarantees for loans used to finance property development projects within an SMSF could trigger the non-arm’s length income (NALI) provisions and the associated penalties, according to a legal specialist.
DBA Lawyers senior associate William Fettes noted the ATO’s SMSF Regulator Bulletin (SMSFRB) 2020/1 made it clear this is an area of concern and could indicate the parties involved are not interacting on a commercial basis.
“Guarantees are potentially a big one…we need to be mindful they could be a source of technical legal risk,” Fettes told attendees of a DBA Lawyers webinar he hosted on Friday.
“There could be different types of guarantees where there is real commercial risk involved, and the guarantees are really a key part of whether the transaction goes ahead or not, and that’s where I really think that they are a big NALI problem.
“They could practically cause someone to become unstuck because not everything’s a boilerplate guarantee that you might give a vendor as part of purchasing real estate for example,” he said.
Despite these arrangements posing a compliance risk, Fettes added he was yet to encounter a situation where an SMSF had fallen foul of the NALI rules due to a loan guarantee as they are common place and found in most contractual arrangements.
“In practical terms, it’s a hard one for the ATO to focus on because if they did really dig their heels in on the problematic nature of guarantees it would probably open a can of worms,” he explained.
“We don’t often see standard guarantees that are provided as part of common commercial transactions, including real estate transactions, really being [identified] as a major source of NALI by the Commissioner.
“They are quite standard and I can’t think of many examples I’ve seen where there has been remuneration to the guarantor for their guaranteeing services, so it just doesn’t happen.
“It would also need to be priced appropriately to ensure if it was going to have any curative value in terms of that NALI risk. You need to actually price the value of the guarantor in providing the guarantee, so that’s quite a tricky proposition,” he concluded.