01/03/2017

The ATO has established a new approach to encouraging trustee compliance.  

Setting up a self managed super fund (“SMSF”) can be quite daunting, especially since the responsibility for ensuring compliance with superannuation laws rests with the trustees of the Fund.

As the ATO regulates SMSFs and administers superannuation laws in relation to them, trustees need to keep abreast of possible changes as they may require you to adjust the way you address your superannuation compliance responsibilities.

The ATO has, in the last year, altered its approach in encouraging trustee compliance by issuing non-compulsory guidelines. These contain a set of ATO accepted terms which, if trustees choose to adopt, will ensure that the ATO will not examine their superannuation-related transaction.

One such example was the Practical Compliance Guideline in relation to arm’s-length terms for limited recourse borrowing arrangements by SMSFs (“PCG 2016/5”). First published in April 2016, this guideline set out related party loans terms, and trustees who adhered to them were given the guarantee that they would not be at risk of coming under the non arm’s length income provisions.

The guidelines were updated in September 2016 to extend the deadline (to 31 January 2017) for complying with these terms as well as to incorporate the newly released taxation determination (“TD 2016/16”).  TD 2016/16 is to be regarded only when related party loan terms do not mirror those in PCG 2016/5 and discusses indicators that the ATO may rely upon when determining whether income earned by an SMSF will be non-arm’s-length income. Examples listed included the presence of a zero interest rate and high loan-to-value ratios.

Unsurprisingly, PCG 2016/5 and TD 2016/16 garnered significant interest from our clients as a large proportion of their SMSFs had existing related party loan arrangements. Many requested an amendment to the terms of their loan to mirror PCG 2016/5’s terms and we promptly assisted by preparing necessary documentation to effect that.

In an address to The Tax Institute in August 2016, the Assistant Commissioner at the ATO, Kasey MacFarlane, referred to the PCG 2016/5 and hinted that more of these guidelines would be issued by the ATO in relation to a number of superannuation transactions.

Adhering to this non-compulsory guideline gives assurance that this transaction is within the parameters of the ATO’s rulings. Should you wish to discuss PCG 2016/5 and its implications for your related party loan arrangement, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.