SMSF trustees with related-party limited recourse borrowing arrangements (LRBA) are unlikely to pass an audit unscathed if they fail to provide all necessary documentation now non-arm’s-length income (NALI) laws apply and are being closely watched by the ATO, an auditor has noted.
ASF Audits head of education Shelley Banton said while ATO Practical Compliance Guideline (PCG) 2016/5 made it clear what the safe harbour terms are to ensure a related-party LRBA is comparable with a similar commercial arrangement, auditors are becoming more wary of funds that fail to provide evidence of meeting those requirements.
“The burden of proof is still on the trustee to show the LRBA is on commercial terms and if they don’t meet the requirements of PCG 2016/5, it doesn’t necessarily mean they have a NALI problem, but it will be 100 per cent up to the trustees to prove that arrangement is on commercial terms,” Banton said at The Tax Institute National Superannuation Conference in Sydney last week.
“The ATO has suggested the only way that can happen is for the trustee to almost get a loan agreement with a bank or a non-bank financial intermediary and have that document in their hands to prove what they’ve got as a related party matches those commercial terms.
“What is an auditor going to do if you don’t provide that evidence or it is different from what’s in PCG 2016/5?
“It depends on what we’re going to get at audit. It depends on the facts and circumstances of the loan agreement and what are they going to provide us.
“The issue is that auditors are not taking the risk on this one. We’re not taking the risk on anything actually anymore. Some might take a risk, but it depends how long you want to keep your hand on the stove as an auditor.
“In terms of having the risk when there isn’t conclusive evidence a related-party LRBA is on commercial terms, we will have to qualify part A of the audit report because the tax has been materially misstated.
“This means the trustee will have to answer yes at question six on the return, which says there’s been a part A qualification, and fill in question U at the income section, which is all about how much NALI there is in the fund.”
