Two areas of legal clarity are of great concern for DIY super investors. One is the lending of funds on favourable terms to make investments in direct property or shares. The other is the rules for allowing excessive after-tax (non-concessional) contributions to super to be refunded rather than penalised by having the top personal tax rate (47 per cent) plus the Medicare levy imposed on the excessive amount.
The ultimate situation is not yet clear. But the AFR has an interview with superannuation tax adviser Daniel Butler of DBA Lawyers. He thinks the changes to the law could be 'quite dramatic'. He believes the ATO may forbid funds borrowing from related parties:
"This is a distinct possibility, says Butler, and would be better than the government scrapping DIY fund borrowing, a suggestion made by the financial system inquiry (also known as the Murray review).
DIY funds borrowing from related parties has been a controversial issue since the ATO approved a loan arrangement in a private binding ruling application that allowed a DIY fund to borrow from a related party and pay no interest on the loan. It later rejected at least a dozen other applications for related party loans with very low or nil interest rates and other favourable terms.
“The quickest way the government could clean up any controversial limited recourse borrow issues is to prohibit any related party loans,” Butler says. This would introduce a no-argument solution where funds wishing to borrow to invest would simply have to deal with a bank. It would also ensure every transaction is at arm’s length because that’s how banks do business.
With this as a possibility, Butler says any fund wishing to organise a related party loan should act sooner rather than later because if there is a dramatic change then the only arrangements that will be allowed are loans already organised, on terms that are currently acceptable.
A non-controversial related party loan has generally been regarded as acceptable so long as the loan terms are organised on an arm’s length basis, meaning they are very similar to terms between a fund and a commercial lender. This would suggest a loan with a similar interest rate, security requirements and amount lent (the loan to valuation ratio) to a commercial lender. Among the controversial terms in overly generous friendly party loans have been loans for 100 per cent of the property value, very flexible repayment terms as well as concessional interest charges.
Butler cautions that if super loan arrangements with related parties are restricted, DIY funds that have organised such loans on more favourable terms should expect the ATO to go back and start examining funds that have completed related party limited recourse loans.
If funds see any problems, they should amend arrangements before the taxman visits."
It is a salutary warning.