Part III of III
In the first of a series of three articles James looked at the government’s response to the financial inquiry and surmised it was good news with LRBA’s being left on the table, albeit with a new review scheduled for 2018. In the second article he explained that although the look through provisions are now legislated there is a red flag when planning to conduct improvements to an asset.
In this article he looks at related party loans on non-commercial terms to bring accountant’s seeking a solution to the Accounting exemption expiry up to date.
Related party loans on non-commercial terms
In 2014 ATO stated that where the loans did not reflect commercial terms, the income derived from the assets purchased under a LRBA would be treated as non-arm’s length income of the SMSF. Non-arm’s length income is taxed at a rate of 47%.
While the Interpretive Decisions apply from the 2014 year of income, no guidance was provided in relation to non-commercial related party loans established before 1 July 2013 – happy days but wait…
The ATO has since stated that any pre-1 July 2013 loans that have been arranged on non-commercial terms will need to be rectified. The ATO expects that such arrangements should be restructured on commercial terms by 30 June 2016 – hmm not so happy after all.
Unfortunately some SMSF trustees may have difficulties in complying with this deadline.
For example, if a related party had lent 100% of the purchase price of an asset to the trustees of a SMSF, and the loan to value ratio (LVR) for a similar loan, if arranged on commercial terms was (say) 70%, and the current LVR, even after asset revaluation is (say) 85%, the trustees will need to make a capital repayment to the related party lender in order to reduce the LVR to 70%, by 30 June 2016.
Accountants and Advisers should take steps to contact clients who may be affected as soon as possible so that remedial action may be taken to ensure compliance by 30 June 2016.
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