SMSF related party loans: ATO says OK to a 0% interest rate

A related party loan can be a useful alternative to a regular bank loan for a self-managed super fund (SMSF) looking to invest in property (or another asset).

Both loan arrangements are limited recourse in nature (that is, the lender’s recourse is limited to the asset purchased in the event of default) however, the key difference with a related party loan is that the finance for the purchase is provided by a related party (to the SMSF) instead of a financial institution. Related parties include any member, relative of any member, a relative of the spouse of any member and an entity (such as a company or trust) controlled by one or more of the above individuals.

Like a traditional loan, a related party loan has a loan agreement outlining the terms of the loan between the related party lender and the SMSF (e.g. amount borrowed, loan term, applicable interest rate, repayment structure and frequency etc).

However, since the Superannuation Industry (Supervision) Act 1993 (SIS Act) was amended to permit SMSF’s to borrow in 2007, it hasn’t been clear what interest rate should be charged by the related party to the fund. Specifically, it hasn’t been clear whether a discounted interest rate could be charged to make the loan arrangement more favourable to the SMSF and if so, whether such a discount (to a market rate of interest) would be classified as a fund contribution on the basis that increased capital would remain in the fund.

However, the ATO has now provided clarity around both these questions.

ATO ID 2010/162 states that if a SMSF borrows money from a related party under terms more favourable to the fund under a limited recourse borrowing arrangement, a breach of section 109 of the SIS Act will not occur. Further, the ATO have specifically confirmed that they are comfortable with a zero interest rate being charged by the member to the fund.

Additionally, the ATO have confirmed that a reduction in (or a complete absence of) a rate of interest under a related party loan arrangement will not be classified as a fund contribution. Instead, the ATO have adopted the view that it is simply a saving of an expense to the fund.

This confirmation from the ATO now means that SMSF members (and advisers) have greater scope to implement and manage related party loan arrangements.

 


This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial and tax advice prior to acting on this information.Opinions constitute our judgement at the time of issue and are subject to change. Financial Planning Expert Pty Ltd does not give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
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    Financial Planning Expert is an independent financial planning business based in Melbourne. We provide genuinely independent and conflict free financial advice. We’re experts in self-managed superannuation fund (SMSFs) advice and strategy, retirement planning, property and share investment advice, life and income protection insurance, tax planning, asset protection, estate planning and advice for Australian expatriates.