You Being the Lender/Bank

It is possible that the SMSF members can be the lender or entities they control can be the lender, provided essentially the same documentation expected with a bank (non related party lender) is implemented with the related party lender.

You (a related party) may need to lend to the SMSF for a deposit to purchase property (say 20% of the purchase value plus purchase costs) to enable the property to be purchased using bank loan funds where a 80% LVR is available. The ATO has advised that this is possible provided documentation is clear that the two loans are part of a single arrangement for the purchase of a single acquirable asset.

A previous advantage to yourself being the lender is that pursuant to a prior announcement from the ATO the lender can lend the funds under the borrowing arrangement at interest rates less than arms length rates without breaching S109 (dealing at arms length). This can previously afforded clients with tax advantages and strategies to increase the amounts in your SMSF if you have left it to late in terms of contributions. The ATO in the past asked was it a breach of the SIS act to charge a Nil interest rate, the ATO confirmed it was not a breach. However the ATO has now changed its view and non arms length rates or dealings would be a breach.

There is also some risk that the ATO may consider it is a breach of s109, <read more>.  The ATO has issued a Taxation Determination, setting out when a non-arm’s length Limited Recourse Borrowing Arrangement could result in Non-Arm’s Length Income. However the ruling is not so helpful for borrowings for acquisition of alternative assets such as units in private unit trusts or shares in private companies.

The latest ruling at the time of editing this page dealing with NALI (non arms length income) is Taxation Determination TD 2016/16 released on 28 September 2016.

Income of the SMSF that is determined to be NALI will be subject to tax at the highest marginal rate currently 47% at the time of editing this page.