Limited Recourse Borrowing Arrangement (LRBA)
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.
With only a couple of months until all 2013/14 SMSF annual returns should be lodged the ATO has issued several “tips” to help to avoid misreporting Limited Recourse Borrowing Arrangements (LRBAs) in the SMSF Annual Return.
The ATO warns that, where an SMSF has a LRBA, to “make sure you report them at the LRBA labels in Section H: Assets and liabilities of the SAR [SMSF Annual Return].”
“We have noticed some misreporting at these labels,” said the ATO.
Update: The Tax and Superannuation Laws Amendment (2015 Measures No. 2) Bill 2015, including look-through tax treatment for SMSF LRBAs, has passed both houses of Parliament. The bill may have changed since the draft was released. Treasury has yet to publish consultation submissions received.
The Treasury has released an exposure draft of legislation to enact ‘look-through’ tax treatment of instalment warrants, including SMSF Limited Recourse Borrowing Arrangements (LRBAs).
The draft bill would amend the Income Tax Assessment Act 1997 to look-through an instalment warrant or LRBA trust so that all income tax consequences of the underlying asset would flow-through to the investor, not the trustee.
The Treasury says that “long-standing industry practice” has been to ignore the trust structure in instalment warrants and LRBAs, and treat the investor as the owner of the asset. The purpose of the exposure draft is to “remove any uncertainty about how the law applies.”