ATO SMSF decision queried

A recent interpretive decision issued by the Australian Taxation Office (ATO) has prompted suggestions of inconsistency around the treatment of related party transactions for self managed superannuation funds (SMSFs).

The ATO interpretive decision essentially gives the green light to an SMSF borrowing money from a closely related party on beneficial terms — something which runs counter to its interpretation of instances where people who pay more than market rent on commercial properties leased from an SMSF.

Some people are suggesting it could allow SMSFs to benefit from borrowing from related parties at almost nil interest.

The ATO interpretive decision deals specifically with whether the trustee of an SMSF would be in contravention of the of the Superannuation Industry (Supervision) Act if the SMSF borrowed money from a related party under a limited recourse borrowing arrangement on terms favourable to the SMSF.

It said that it did not believe a breach would occur because while the terms of the loan could not be more favourable to the related party than would have been the case had the parties been dealing at arm’s length, there is no contravention of the legislation if the terms are more favourable to the SMSF.

A number of specialist financial services lawyers have expressed concern that the ATO’s approach in the interpretive decision has created inconsistencies around related parties issues that will need to be resolved.