For trustees of self-managed super funds (SMSFs), two very important deadlines are fast approaching and may require some attention before the end of the 2016 tax year.
Deadline #1 – Non-arm’s Length Limited Recourse Borrowing Arrangements (LRBAs)
The Australian Tax Office (ATO) has recently issued some Interpretative Decisions expressing a view that non-arm’s length income provisions can apply to LRBAs not entered into on commercial terms.
Non-arm’s length income is currently taxed at 47%.
In a news article published in December 2015, the ATO advised that SMSF trustees should review such arrangements and where they are not consistent with arm’s length dealings, take necessary steps to ensure that they become consistent before 30 June 2016.
For all related party loans that have not previously been maintained on commercial terms, this requires a review of the overall arrangement to ensure the loans are on terms similar to arm’s length loans, including the consideration of:
- Interest rates, particularly zero or below market rates;
- Loan terms, including timing and frequency of repayments; and
- Loan to value ratios.
The ATO has indicated that it will not review SMSFs for 2014/15 or earlier years purely because the fund has entered into a LRBA. However, it is likely that compliance resources will be allocated to reviewing LRBAs of SMSFs for 2015/16 year and later years.
What action needs to be taken?
SMSF trustees need to review the time and costs associated with varying their loan agreements. They will also need to consider the impact on cash flow if loans are to be restructured by 30 June 2016.
Pilot can also assist with a review of your current arrangements.
Deadline #2 – Collectibles and Personal-use Assets
Legislative conditions apply for collectible and personal-use assets acquired by SMSFs on or after 1 July 2011.
The regulations cover the following assets:
- Rare folios, manuscripts or books
- Wine or Spirits
- Coins or medallions
- Recreational boats
- Postage stamps or first day covers
- Memberships of sporting associations or sporting clubs
SMSFs that held these types of assets prior to 1 July 2011 were granted a transitional period until 1 July 2016 to comply with the new rules.
Broadly, these rules stipulate that collectibles and personal use assets cannot be leased to, used by or stored in the private residence of related parties.
The trustees must document and retain for 10 years the decision as to where to store the assets. Separate insurance held in the name of the SMSF must be taken out within seven days of acquisition.
What action needs to be taken?
If the SMSF does not comply with the new rules, steps must be taken to transfer these assets out of the SMSF prior to 30 June 2016.
The assets can also be sold to a related party provided they are transferred at market price as determined by a qualified independent valuer.
Pilot can assist in ensuring that any assets covered by these regulations remain compliant.
If you have any questions related to these upcoming deadlines, please contact Simon Barry from our Business Advisory division.