Low interest loans to SMSFs
The ATO’s NTLF Superannuation Technical Sub-group meeting recently discussed their views on below-market value interest rates.
The ATO has indicated that where a related party lender offers a discounted rate of interest to a SMSF under a Section 67A borrowing arrangement, the discount is not considered a contribution received by the SMSF because it does not increase the capital of the fund.
It has also clarified that a SMSF can also enter into a borrowing arrangement with a related party even if a zero rate of interest is charged by the related party lender and only principal repayments, with no imputed interest, are made throughout the loan term in accordance with the loan agreement.
It should be remembered that the NTLG Superannuation Technical Sub-group minutes are not binding on the ATO.
In addition, the minutes did not discuss or consider the potential application of Division 7A, nor did they consider the non-arm’s length income provisions of the Income Tax Assessment Act 1997.
As to the former, if the lender is a company (or even a trust) the loan could be treated as a dividend unless the loan meets strict criteria.
As to the latter, when setting the terms of a related party loan, parties should be able to demonstrate that the income that the fund will generate is the same as if dealing at arm’s length.