Relief for SMSFs with LRBAs

The SMSF Association has welcomed the announcement that self-managed superannuation funds (SMSFs) with a limited recourse borrowing arrangement (LRBA) where a lender is a private company will not suffer adverse tax consequences if the loan interest has been capitalised due to COVID-19. 

The announcement came from the Australian Taxation Officer (ATO) during the SMSF Association’s National Conference last week and SMSF Association deputy chief executive and director of policy and education, Peter Burgess, said this provided certainty. 

“It means, assuming all other conditions are satisfied, the option of capitalising interest in circumstances where the SMSF would be eligible for loan repayment relief under the COVID-19 relief measures will not cause the loan to be treated as a deemed unfranked dividend or the relevant income taxed as non-arm’s length income,” Burgess said. 

“We had previously highlighted an inconsistency between the requirements that must be satisfied under Division 7A of the ITAA 1936 for the loan not to be treated as a deemed dividend and the requirements of the ATO’s safe harbour provisions for the relevant income received by the fund not to be taxed as non-arm’s length income.  

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“Although the safe harbour terms, and the associated COVID-19 relief measures, do permit the capitalisation of loan interest, it was unclear whether this would breach Division 7A and result in the SMSF having to treat the loan as a deemed unfranked dividend, which would then have adverse tax implications for the fund. The ATO has now confirmed, that assuming all other conditions are satisfied, this will not be the case.” 

The ATO also said taxpayers needed to apply for administrative relief if they were unable to make the minimum yearly repayments on their Division 7A loans by the end of the lender’s 2019/20 income year.