ATO advice for SMSFs with related-party loans

The ATO has recently provided recommendations for self-managed super funds (SMSF) trustees with related party LRBAs that are lodging before the 31 January 2017 compliance deadline.

The Tax Office stated that the relevant income of an SMSF is considered NALI (non-arm’s length income), and should be reported as such in the SMSF’s 2016 annual return, when trustees have:

• taken no action to ensure any LRBA in their fund is on terms consistent with an arm’s length dealing and;

• not made the required catch-up payments at the time of lodgement of its 2016 SMSF annual return

Prior to 31 January 2017, the Tax Office will not be allocating compliance resources to review the borrowing terms of a fund’s LRBA. Therefore, provided the LRBA in an SMSF is consistent with an arm’s length dealing and the required catch-up payments are made by 31 January 2017, the fund is not at risk of ATO enforcement action.

Strict consequences, such as ATO compliance and enforcement action, await SMSF trustees who do not ensure that any LRBA in their fund is on terms consistent with an arm’s length dealing and if catch-up payments are not made by 31 January 2017.

Where the necessary action has not been undertaken by 31 January 2017, SMSF trustees must take immediate action to amend any previously lodged 2016 SMSF annual return if it did not correctly report relevant income as NALI.