Zero interest related-party loans acceptable, says ATO
The Australian Taxation Office (ATO) has reconfirmed that interest payments are not an essential feature of a loan, potentially opening the door for zero-interest related party loans to self-managed super funds (SMSFs).
In the minutes of a recent National Tax Liaison Group (NTLG) meeting, the ATO confirmed a ruling from 2009 which stated that there are two essential features of a loan: a temporary transfer of money, and an obligation to repay on the part of the borrower.
The ATO also stated that a low interest loan would not be deemed as a contribution to an SMSF.
According to The SMSF Academy managing director Aaron Dunn, the comments by the ATO in the NTLG minutes (which are not binding) are encouraging for trustees who have exhausted their "bring forward" rule and are looking to make extra contributions to their SMSF.
"They could contribute that money in, use a zero rate or a low rate and get the timing benefit of it being inside super for whatever period the loan agreement states," he said.
The most important thing for practitioners is to ensure the loan is appropriately documented and there is strict adherence to its ongoing terms and conditions, Dunn said.
"But as long as that is done, there's arguably no reason you couldn't apply what was asked of the ATO in the NTLG meeting," he said.
Self-Managed Super Fund Professionals' Association technical director Peter Burgess said that while the strategy was theoretically possible, it could end up being more trouble than it was worth.
"If you're going to do it every year then you need to set up a separate limited recourse borrowing arrangement every time. It's costly to do that - it would be a lot of hassle," he said.
Another potential issue is that low interest related-party loans may breach the non-arm's length income provisions in the Income Tax Assessment Act.
Burgess said he expected the Tax Commissioner to make some recommendations to Treasury about the topic.
"There's some pretty undesirable outcomes here for the commissioner in terms of being able to lend your SMSF however much you want," he said.
"That money's used to purchase an asset in a low tax environment and there are no caps on it, so I think the commissioner will take the opportunity to [make some recommendations to Treasury]," Burgess said.
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