The ATO has released a taxation determination regarding how it will apply the non-arm’s length income (‘NALI’) rules to income generated from assets purchased by an SMSF using a related party ‘limited recourse borrowing arrangement’ (or ‘LRBA’).
Although the ATO states that: “in some very limited circumstances, the NALI provisions may not apply to an arrangement, even though it’s not on arm’s length terms”, in their opinion, for the vast majority of cases, if there is an LRBA that is not at an arm’s length terms, NALI will arise and the income may be taxed at the highest marginal tax rate of 47%.
Importantly, the ATO has given SMSFs until 31 January 2017 to ‘get their house in order’. This means that all SMSFs with related party borrowings should review the terms of those borrowings by 31 January 2017 to consider whether they are ‘arm’s length’. Please contact this office if you would like any assistance in this regard.
