In December last year, the ATO issued two interpretive decisions, ATO ID 2014/39 and ATO ID 2014/40, which confirmed that nil interest borrowing from related parties can cause non-arm’s length income (NALI).
Speaking at a seminar on Friday, DBA Lawyers director Daniel Butler said the ATO has informed him that the tax office is “unlikely to follow up cases that have self-corrected” in a non-binding statement.
“So if you have a client with a related-party non-commercial LRBA and you put it on a proper basis moving forward, it is unlikely the ATO will follow that up,” said Mr Butler.
The ATO did note, however, that “the legal position is that NALI can apply from the start of the arrangement and if the ATO are forced to undertake an audit, this would certainly be considered,” he added.
Reading between the lines of this statement, Mr Butler said it shows that for clients who “don’t have any skeletons in the closet” and rectify the loan for this financial year by basing it on benchmarks “the ATO may be unlikely to follow through on past contraventions”.
“I mean if you [do have] skeletons in the closet and other contraventions and issues happening and you’ve also got this LRBA which is too good to believe, well obviously you’re already in the risk category,” he said.
The ATO also stated, however, that it is “its desire that SMSF trustees do correct on a retrospective basis”.
“So as you can see, if you have clients and they don’t accept any risk, then they should go back and self-correct on any past years,” Mr Butler said.
In order to do this, the client or SMSF practitioner must “calculate the benchmark, calculate the difference, the advantages that they’ve had and make good for that difference – it will mean the super fund has to pay out a lot of interest in one hit,” he explained.
“If you don’t self-correct retroactively you have that element of risk that this non-binding opinion that I’ve just disclosed to you from the ATO may not be acknowledged by the ATO because they’ve decided to take a different course of action down the track,” he said.
“There is some comfort now [however] that prospectively self-correcting is the way to go, but if you’ve got a very low risk-tolerant client you’d want to go back retro-actively and rectify from the get go.”