- ATO puts a dampener on related party loans to SMSFs
- ATO determination on segregating a single bank account issued
In terms of changes to the SMSF environment, it’s been a quieter month, although the Tax Office has brought into question the strategy of making related party loans to SMSFs and has issued guidance on several other matters.
Private tax ruling on ‘interest-free, related party loan’ to SMSF
Just when you thought it was safe to make a zero-interest, 100% loan-to-value ratio (LVR), limited recourse loan to your SMSF, think again. The trend towards SMSFs receiving low (or zero) interest related party loans – which effectively boost the value and income of the SMSF without having to worry about contributions caps – has seen the Tax Office taking a tougher approach.
In a recent private tax ruling application, the Tax Office decided that the additional income being earned from the related party loan arrangement should be treated as ‘non-arms length income’ of the SMSF.
The effect is that the SMSF must pay tax on this income at the top marginal tax rate (45%), a result likely to defeat the strategy’s purpose.
This outcome serves as a reminder that not all Tax Office guidance is created equal. If you’ve been given a private ruling, it’s binding for you and your circumstances, but no one else (and then, only to the extent the facts are accurate and the law doesn’t change). There’s been plenty of cases where the Tax Office has moved away from positions taken in earlier private rulings, especially when they kick-start a trend.
This strategy kicked off with minutes from a Tax Office discussion group meeting (National Tax Liaison Group) where they commented positively on one aspect of related party loans. It can be dangerous to build aggressive strategies around views expressed in this type of format. Should the strategy become widespread, it effectively challenges the Tax Office to take an alternative official view. In this particular case, the Tax Office didn’t comment on the ‘non-arms length income’ rules.
As we said in Don’t crap in your SMSF, think very carefully before adopting any aggressive strategy, especially if it’s popular. The super tax concessions are a political hot potato – as we’ve seen with dividend washing and now this– so there’s a strong incentive inside the Tax Office to clamp down on strategies that impose additional costs on the budget.
We’re yet to see if this strategy is dead and buried, or simply needs to be done in a less aggressive manner. Only time, and further Tax Office decisions, will tell.
Action point:If you’re thinking of using the low (or nil) interest related party loan strategy make sure you seek advice and consider applying for a private binding ruling from the Tax Office. If you’ve adopted this strategy without a ruling, you should speak to your advisor about the impact of the Tax Office’s position.
Tax office ruling on segregation in pension phase with one bank account
The Tax Office has released Taxation Determination TD 2014/7 for super funds looking to segregate in pension phase with a single bank account.
When a fund establishes a super income stream (pension), it’s entitled to a tax exemption on income from assets supporting the pension. To get this, it needs to either go through an actuarial process each year (to allocate its income between taxable and exempt) or segregate (separately indentify) the ‘pension assets’ (see ATO website or more).
In TD 2014/7 the ATO has said that a fund can operate a single bank account with sub-accounts, with each sub-account being eligible to be a segregated pension asset. These sub-accounts can either be officially maintained at the fund’s bank or ‘virtually created’ through the fund’s accounting records.
The benefit of this ruling is that a SMSF need only keep one bank account. But it’s not as simple as it seems. Since payments will need to be quickly allocated between sub-accounts, methods for allocating bank interest income will need to be worked out and a fund may need multiple sub-accounts to cover multiple pensions, using this approach may end up a lot more administrative trouble than its worth.
Liam typically recommends to his clients that they use a separate pension bank account and will continue to do so, despite this ruling. Trustees should retain enough funds in the account (or other liquid assets) to make sure they can cover minimum pension payments for a reasonable period.
Other recent developments
Members may also be interested in the following:
ATO guidance on assessing Division 293 tax debt
The ATO has updated its website with information to assess whether you’re liable to pay Division 293 tax. This is the surcharge payable on super contributions by those earning over $300,000.
ATO guidance on new penalty powers that apply to SMSFs
The ATO has published guidance on its website on the new simplified penalty regime for SMSFs, to apply from 1 July 2014.
Look out also for a future article, where we’ll explain the new regime in more detail.