Section 67A allows a Self-Managed Super Fund (“SMSF”) to borrow to acquire an asset subject to strict conditions such as holding the asset in a separate Holding Trust, using a nonrecourse loan and the SMSF must only purchase a single acquirable asset.
It has long been known and the ATO has confirmed that a related party to a member of a SMSF is entitled to lend to that person’s own super fund. For example you can personally or an associated entity can lend to your own SMSF to acquire an asset.
In 2010 the ATO issued an interpretative decision indicating that a related party could charge less than a market rate of interest on a loan to their SMSF, but could not charge more than a market rate.
For many years super fund advisors have operated on the premise that it is okay to allow related party loans to a SMSF to operate on more favourable terms than might, otherwise, be able to be obtained from a commercial lender. Such things as lower or no interest rate, no repayment requirements and no security.
In December 2014, however, the ATO issued a further interpretative decision indicating that a related party must lend to an SMSF on full commercial terms and they must not be more favourable to the SMSF than would be available in the open market.
The problem is that income earned from an SMSF from a property acquired with borrowed funds from a related party at zero interest or other favourable conditions, could be considered “non-arm’s length” income and consequently subject to tax at the maximum tax rate (47%).
It is therefore suggested that a related party who lends to their SMSF, must charge a commercial interest rate, the loan to valuation ratio must be no less than what a bank would permit, there must be adequate security such as a mortgage and there must be regular repayments and perhaps even personal guarantees.
If you are considering lending to your SMSF or you have already done so, then you need to carefully check your documentation to ensure that they are on commercial terms so that income or gains are not potentially deemed to be non-arm’s length and therefore subject to maximum tax rather than the concessionary rate charged normally on a super fund.
At Everingham Solomons, we have the expertise to assist you in these complex issues because Helping You is Our Business.
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