The Australian Taxation Office (ATO) has confirmed favourable interest rates charged to a self-managed superannuation fund (SMSF) do not come into consideration when assessing the legitimacy of a related-party loan.
The clarification comes after an adviser challenged ATO Interpretative Decision ID2010/162 to find out what an appropriate interest rate would be to charge an SMSF on a related-party loan if it were to be a favourable rate.
The decision was queried as to whether it would be above board to charge an interest rate of anywhere between 5 per cent and 0 per cent.
"The commissioner came back to him and said, and this was for limited recourse borrowing arrangements, 'in our ruling, interest is not a factor of whether there is a borrowing arrangement at all'," SMSF Strategies principal Grant Abbott said at the 2012 SMSF Strategy Day in Perth yesterday.
"It means to put a legitimate borrowing together we need to see that there's a loan agreement in place. We need to see there is a lender and a borrower on a properly documented loan agreement.
"Interest is not a factor as to whether there is a loan agreement at all."
However, Abbott warned charging interest at 0 per cent was probably not a prudent strategy even though it was allowed.
"Under basic contract law you need to show some form of consideration. So I'd be super comfortable if you just used the Reserve Bank borrowing rate," he said.
He suggested advisers looking to take advantage of this ruling to do so with some urgency.
"It is better to do things sooner rather than later because later they may well change the laws," he said.
On a related note, the marketing email distributed about the SMSF Strategy Day sent on 12 July incorrectly implied the event was endorsed by the Institute of Chartered Accountants in Australia. This is not the case. For more information about the institute's SMSF training opportunities, please visit www.charteredaccountants.com.au/smsfconference.
