7th April 2016
The ATO has just released their much anticipated Practice for related party limited recourse loans.
As previously established, the ATO have determined that all income and realised capital gains from non-commercial related party loans will be taxed as non arm’s length income. Such income may only be reduced by expenses relating directly to the asset. The tax, currently 47% with the budget repair levy, applies even if the fund is fully in pension.
The ATO have stated that they will not consider previous years’ activities if the loan terms and conditions are brought to order for the current financial year. This includes paying a commercial rate of interest from 1 July 2015 and bringing the loan to valuation ratio, term and other aspects into line by 30 June 2016. Failure to do so will make the fund liable for reassessment by the ATO for all previous years the loan has been in place.
The challenge has been to determine what the ATO regard as arm’s length. This practice guideline illustrates safe harbour conditions which, if complied with, will ensure that the ATO’s requirements have been satisfied and any activities in previous years, even zero interest loans, will be ignored.
Because of the size of this article it has been placed on our website for your perusal. It will also be updated from time to time as more clarification comes to hand.
We are currently building a calculator to illustrate the specific Safe Harbour changes required for any particular loan scenario. This calculator will be free to our alliance partners and accessible by way of specific logins. It will be available by the end of next week.