SMSF Limited recourse borrowing arrangements

Limited recourse borrowing arrangements – related party loans Issues raised   If a related party lender offers a discounted rate of interest to an SMSF under a section 67A borrowing arrangement, would the discount be considered a contribution received by the SMSF? Can an SMSF enter into a borrowing arrangement under section 67A of the Superannuation Industry (Supervision) Act 1993 (SISA) with a related party if a zero rate of interest is charged by the related party lender and only principal repayments, with no imputed interest, are made throughout the loan term in accordance with the loan agreement?

Background information provided by member Section 67A of the SISA does not prohibit an SMSF from entering into a borrowing arrangement with a related party lender. ATO ID 2010/162 states that an SMSF trustee does not contravene section 109 of the SISA if it borrows money from a related party of the SMSF under a limited recourse borrowing arrangement (LRBA) on terms more favourable to the SMSF. In the example used in ATO ID 2010/162, the interest rate imposed under the LRBA is lower than the rate that would be available to the SMSF from an arm’s length lender for an otherwise similar loan. In this example, the ATO concluded that the borrowing entered into by the SMSF trustee entails no contravention of paragraph 109(1)(b) of the SISA because the terms and conditions of the borrowing are not more favourable to the other party than would be reasonably expected if the parties were dealing with each other at arm’s length. Similarly subsection 109(1A) of the SISA applies to dealings with parties that are not at arm’s length, during the term of the investment. Subsection 109(1A) of the SISA applies after an investment to which paragraph 109(1)(b) applies has commenced and is interpreted in that context. As a result provided the dealing is not more favourable to the other party than would be expected had the parties been at arms length then the provision will not be contravened. However, it is not clear in ATO ID 2010/162, whether the discount offered in the example, would constitute a contribution received by the fund.

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