Tag Archive: tax liability

  1. Need a loan for your SMSF? Welcome to the Related Borrowing party!

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    Did you know you can borrow money from Related Parties rather than banks? Limited Recourse Borrowing Arrangement rules allow you to borrow money from anyone you like – including related parties!

    Many trustees don’t know that their business, a family member, their own company or trust, or even themselves could provide the loan to their SMSF.  In some special cases, you can even borrow money personally, and then on-lend that money to your SMSF – how’s that for flexibility?

    Borrowing within an SMSF allows your fund to act quickly if it wants to purchase an investment asset, providing a quick injection of money (over and above the contribution caps) when it’s time to do deals.

    Setting up a ‘self-loan’ structure within an SMSF means that the money lent to your fund will be repaid to you, so this money won’t be locked within your SMSF until you reach retirement age (as is the case of a contribution).

    Any related party loans will need to follow the same ‘arms-length’ rules that would apply if you were dealing with an unrelated lender. This means that the loan arrangement will need to be entered into and carried out on commercial terms, and repayments will need to include a commercial rate of interest – which will be taxable.

    Other ‘arms-length’ rules that you should watch out for in this scenario include:

    • Don’t charge too high an interest rate! If you do, the structure could be viewed as an “early access scheme” or otherwise breach the sole purpose test through providing a ‘non-retirement’ benefit to the Members.  You will also create a tax liability in your own name.
    • Is your interest rate commercial? There is no official ATO restriction on this – but to prove the interest rate is commercial you should consider ensuring rate is in line with what the banks would charge.
    • Don’t fall in the third-party lender interest rate trap! On the face of it, on-lending a third-party lender loan to your SMSF at the same interest rate as that charged by the lender makes sense. Nope! As the third-party loan is a full recourse loan and the loan you make to your SMSF is a limited recourse loan – different rules apply. Commercial ‘rate for risk’ rules dictate that the loan to your SMSF should be at a higher rate.

    Related party lending can be the ticket to your next great SMSF investment purchase, as long as you follow all the rules – and make sure it is set up in a way that benefits you. Before you hit the ground running, make sure you have a chat with us about partying safe.

    Update – Is the result of a recent private ATO ruling an indication on their stance toward zero interest related party loans? Full details can be found here http://www.smsfadviseronline.com.au/news/12175-landmark-ato-ruling-issued?utm_source=SMSFAdviser&utm_campaign=SMSFAdviser_Bulletin10_04_2014&utm_medium=email