Finally - Clarity on Related Party Finance for Super Borrowings

by Megan Kelly Published

There has been a lot of confusion as to the ATO’s view on related party lending for a super fund borrowing arrangement. The ATO have offered us some clarity by releasing a Practical Compliance Guideline offering us some “Safe Harbour” related party loan terms.

THE ISSUE

It was always clear that a super fund could borrow from a related party, such as you, to finance a limited recourse borrowing arrangement. Why not be the bank if you don’t need the bank. However the confusion arose as to on what terms a related party loan needed to be on.

The ATO compounded this confusion by releasing a one off opinion which accepted 0% interest rates for related party loans. This opinion was written in response to a question asked considering only one small section of the super legislation. The opinion was never intended to represent the ATOs view on all areas of the super legislation.

At businessDEPOT we always believed that a 0% interest rate resulted in further issues for the super fund.

In an attempt to rectify this confusion, the ATO eventually issued a further 2 interpretive decisions in December 2014. These rulings confirmed that a related party loan term with generous terms would result in non-arm’s length income.

WHAT DID IT MEAN?

All this meant, that if you had loaned money to your super fund and the loan terms were not on arms-length basis, you would be taxed at 47% on all income received from the asset. [i.e. All rental income from a property, and ultimately the property when it is sold by your fund].

The key problem areas that were normally a problem were:

  1. 0% or discounted interest rates
  2. 100% or Higher LVRs than a bank would offer
  3. Unusual repayment terms

But this still left us with the burning question as to what would the ATO accept as arms-length terms?

ATO SAFE HARBOURS

To offer clarity the ATO released a Practical Compliance Guideline yesterday.

In summary, the ATO has set the following benchmark loan terms for related party lending to a super fund to purchase a property:

Interest rate5.75% for 2015/2016 FY
Term of Loan15 years with any refinancing to be limited to an overall 15 year loan term.
Maximum Loan to Value Ration [LVR]70%
SecurityA registered mortgage
Personal guaranteeNot required
Repayment termsMonthly repayments on a principal and interest basis (no interest only)
Loan AgreementsMust be written and executed

The ATO have also released guidance for lending on other assets such as Listed Equities. It is also notable that private share or unit trust investments are not included in any of the safe harbours.

Where you have loan terms or assets outside the safe harbours then it is still possible to apply for a ruling from the ATO on the arrangement. In doing so, it would be advisable to benchmark the loan terms considered against what an actual bank might lend and show evidence of this.

HAVE A RELATED PARTY LOAN TO YOUR SUPER FUND?

If you have an existing related party loan to your super fund and you fall outside the above Safe Harbours, you have a number of options available to bring your loan in line before 30 June 2016:

  1. Adjust the loan terms to meet the guidelines
  2. Refinance to an arms-length lender
  3. Pay out the borrowing

If your fund cannot comply with the ATO safe harbour requirements before the 30 June 2016 deadline, you can write to the ATO to discuss your particular circumstances.

If you are our client and have an existing related party loan, we will be in contact with you in the coming days to discuss your options and confirm the compliance of your loan.

Megan Kelly
read more by Megan Kelly

Megan has extensive experience in the specialist area of self-managed superannuation funds advising a wide range of clients whose situation vary from business owners setting up their own self-managed superannuation funds through to retiree's and inter generational wealth planning.

Megan's specialties include retirement planning, Superannuation Industry Supervisory compliance (SIS), investment rules for superannuation, strategic advice, fund audits and estate planning. Megan is aSpecialist Superannuation Advisor with the SMSF Professionals Association of Australia (SPAA), the leading professional body for SMSFs. She regularly attends the SPAA discussion groups where they discuss recent changes in superannuation and make proposals to government about these changes.

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