It is unclear where the idea for 0% interest rate LRBA started, through the June 2012 meeting of the superannuation technical National Tax Liason Group was likely a key point. In this meeting the ATO was asked if zero interest rate LRBAs would breach the borrowing rules. The answer was no, but the minutes do not record if the discussion included consideration of the Non-Arm’s Length Income (NALI) rules.
The NALI rules increase the tax rate applying to income from an arrangement from the ordinary 15% or 0% for an SMSF to 45%, or 47% in years where the Temporary Budget Repair Levy applies.
SMSF trustees and SMSF professionals involved became concerned when the ATO started issuing private binding rulings stating that similar arrangements resulted in NALI for SMSFs.
This was followed several months later by two ATO IDs, 2014/39 and 2014/40, confirming the ATOs position.
However non-arm’s length income is still a judgement based on the individual circumstances of each case. To simplify matters, while maintaining the integrity of the tax and super systems, the Government should create a safe harbour provision for low interest rate SMSF LRBAs.
Providing the LRBA meets certain basic conditions the NALI rules would not apply. These safe harbour conditions would include a minimum benchmark interest rate and potentially requirements around repayment of principal and security for the loan.
LRBAs which don’t meet these conditions would be dealt with under the existing rules.
If enacted this safe harbour would simplify the administration of the NALI rules and provide some certainty to SMSF professionals and trustees.
You can find the submission to the Treasury here.
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