ATO gives SMSFs until 30 June 2016 to review NALI LRBAs

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ATO, SMSFs, Limited Recourse Borrowing Arrangements (LRBAs) resulting in Non-Arm's Length Income (NALI), ATO ID 2015/27, ATO ID 2015/28The ATO says SMSFs with related-party LRBAs, potentially resulting in NALI, should ensure they are on an arm’s length basis by 30 June 2016.

Update: The ATO has extended the deadline to 31 January 2017.

For some time the ATO has been publicly stating that related party non-commercial Limited Recourse Borrowing Arrangements (LRBAs) could result in Non Arm’s Length Income (NALI). Ordinarily income of an SMSF is taxed at 15%, or 0% to the extent it is in pension phase, but NALI is currently taxed at 47%.

The ATO is encouraging SMSF trustees to review their LRBAs:

SMSF trustees should review any LRBA you have to determine whether it was established and maintained on terms that are consistent with an arm’s length dealing. If this is not the case, we strongly encourage you to take steps to ensure that it is on terms consistent with an arm’s length dealing by 30 June 2016 or to bring the LRBA to an end by that date. You may wish to seek professional advice if you are unsure.

The ATO says it will not be selecting SMSFs for review for 2014/15 or earlier years “purely because the fund has entered into an LRBA.” But the ATO “may allocate compliance resources to review an LRBA of an SMSF for the 2015–16 year or later years.”

The ATO originally set out its argument about NALI applying for LRBAs in two Interpretive Decisions, ATO ID 2014/39 and 2014/40. But, following the passage of look-through tax treatment for LRBAs, these decisions have been withdrawn and two new ones issued:

  • ATO ID 2015/27 Income tax:  non arm’s length income – related party non-commercial limited recourse borrowing arrangement to acquire listed shares
  • ATO ID 2015/28 Income tax:  non arm’s length income – related party non-commercial limited recourse borrowing arrangement to acquire real property

The ATO says where a request is made for a private ruling on the potential for NALI to arise from an LRBA the ATO’s approach “will be consistent with our view in the new ATO interpretative decisions.”

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