Caution urged on related party loans and contribution caps
Financial advisers and self-managed superannuation fund (SMSF) trustees should resist the temptation to use related party loans to overcome contribution caps limits, according to specialist law firm Hall and Wilcox.
In an analysis published this week, the law firm urged advisers not to become too aggressive on the back of December's National Tax Liaison Group meeting that indicated that, generally, a low or no interest loan of itself will not contravene the Superannuation Industry (Supervision) Act and would not give rise to non-arm's length income.
"Trustees and advisers may be tempted to exploit what looks like a great opportunity with a low or no interest related party loan to effectively overcome the contribution caps. We think this is unwise," the law firm's analysis said.
The Hall and Wilcox analysis said the firm took the view that trustees should deal on commercial terms at all times, which meant replicating the terms a bank would offer in each and every instance where the trustee borrowed from a related party.
"In light of the media attention this issue has received and the comments from various industry groups, in our view it is likely that on completion of the two-year review (which we expect to take place in 2013) of the limited recourse borrowing provisions, the ability for a trustee to enter into a low or no interest limited recourse borrowing arrangement will be expressly prohibited," the law firm said.
"Further, any dealings on non-commercial terms are likely to be heavily scrutinised by the fund auditor and the Commissioner of Taxation, should the fund be subject to an audit.
"Thus we recommend trustees do not enter into low or no interest limited recourse borrowing arrangements, but instead ensure that any dealings are on strictly arm's length terms," the analysis said.
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