SMSF Related Party LRBF

The ATO's recent "about face" on a Nil interest rate related party limited recourse lend doesnt come as a shock to many. I would imagine a few of the prominent advocates of such an arrangement are now having to explain some ways to remedy the problem. Strangely its an about-face in a private ruling despite issuing two earlier private rulings with similiar methodology and a (former) NTLG Super Technical view that was along similiar lines. Personally I have had concerns with a zero rate loan as it seemed to satisfy the non-arms length income rules. This seems confirmed now.

Who would do a zero % lend ?? Well to be honest the related party lend is generally used as a contribution 'arrangement' to bypass caps. Not always. Favoured by wealthy and those with large windfall $ they want to bank to super without the low value of contribution caps. A timing difference of sorts. There is no anti-avoidance scheme rule that applies to contributions unlike say s66 of SIS. So Dad lends $1,000,000 to the fund since annual NCC cap is far less and clearly the bring forward rule wont work. This brings $1m to the fund today. To invest in a large value asset such as property - today. If an amount is lent to the fund to acquire a single acquirable asset its not greatly different to a contribution as it causes the fund assets to rise. The strategy is to effect a strategy so the loan liability falls. TR 2010/1 clearly specifies that a loan debt forgiveness is a contribution. So it stands that on an annual basis the debt can be forgiven to the value of an annual cap. ($150K for example) Over several years the loan is repaid. Quite an effective bring-forward contribution strategy. It may assist in aged based circumstances and other cases where timing is essential.

So is it all over ? No. This ruling (which applies only to the specific taxpayers) just addresses and really clarifies what many suspected. The loans terms must be on arms length terms. So:
- A conventional interest rate
- A correctly documented legal loan agreement.
- Appropriate loan security is taken by the lender.

Generally those considering such a strategy need to get very comprehensive financial advice before the legal aspects are then addressed.
- What happens if the lender dies ?? May their estate demand repayment or if its a family could the loan pose a family issue and strain relationships?
- Relationship breakdown issue ?
- Could life insurance assist ?
- What circumstances may affect the capacity for the loan to be discharged as planned ?
- What are the member death benefit instructions ? Strategies that avoid lump sum death benefits may be both preferred or pose a concern.

I have always considered the loan should be on terms no more or less favourable than a bank lender. And that the lender take first mortgage over the property. The solicitor should be able to do this for minimal extra cost. This can be a bit more complex if the single acquirable asset is not real property. But changes to law do allow security to be registered on many more items these days. ASX listed shares remain a concern - The single acquirable asset issue far harder to address.

The conventional related party loan where the member borrows from a bank (perhaps home equity loan) and "back to back" lends this to the SMSF shouldn't be affected. But it certainly introduces caution - Ensure that loan security is taken and that a reliable and quality provider of legal docs such as bare trust / loan documentation etc is used that also addresses loan forgiveness.

As I always say ...."SMSFs are all about three things - strategy, strategy & strategy"
 
At the heart of it is the old premise of "If it's too good to be true, it's probably not true." and proxy-contributions such as the arrangement you're talking about are sure to attract attention over time.

Thanks Paul, I learn something new every day...
 
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