ATO issues response on NALI decision by AAT
A recent Tribunal decision regarding non-arm’s length income is unlikely to apply to private lending arrangements more broadly, says the ATO.
The ATO says a recent decision by the Administrative Appeals Tribunal that was unfavourable to the Commissioner in BPFN and Commissioner of Taxation [2023] AATA 2330, will not have any implications for its advice and guidance.
The ATO issued a decision impact statement last week on the decision which determined whether income derived by an SMSF was non-arm’s length income.
The case involved the trustee of an SMSF who was the sole unit holder of a unit trust, called JJUT, that had fixed entitlement to distributions under the JJUT trust deed.
Through a series of loan agreements, JJUT lent funds to the entity ABC. ABC then lent funds to the related discretionary trust DEF, and DEF then on lent to unrelated third parties.
DEF entered into a number of loan agreements with unrelated third parties. It was accepted in the proceedings that these loan agreements were on arm's length terms.
The loan terms for the loan from the JJUT unit trust to ABC and from ABC to the discretionary trust DEF outlined that the interest rate was would be the same rate that was paid by the third parties to DEF.
The ATO argued that the fact no margin was charged on the interest rates between the various lenders suggested that the scheme would not have been entered into if the parties were dealing at arm’s length.
It also submitted that ABC’s fees were unsustainably low.
The Tax office submitted that by keeping all of the interest for itself, and paying ABC what it described as unsustainably low fees, the SMSF trustee thereby ensured that it earned more than it would have if the parties were dealing at arm’s length.
The Tribunal concluded that the SMSF trustee had derived no more income than it would have derived had the parties been dealing with each other at arm's length.
The Tribunal determined that the evidence established that:
(a) The fees ABC charged were consistent with market rate fees charged by parties dealing at arm's length.
(b) The scheme established under the private lending facility did not differ from what might be expected between independent parties dealing independently with one another in the private lending market at the time of the transactions.
(c) The income derived was not 'more than the amount that the entity might have been expected to derive ... when dealing at arm's length' and, accordingly, that the interest income received by BPFN in the income years ended 30 June 2015, 2016, and 2017 was not NALI.
In its decision impact statement on the decision, the ATO said the decision had no implications for its advice or guidance on non-arm’s length income.
While the ATO acknowledged the Tribunal’s conclusion that the the SMSF trustee and JJUT did not derive more income under this particular scheme based on evidence, it questioned whether the decision “could be extrapolated to arrangements involving private lending arrangements more broadly”.
“When considering the application of subsections 295-550(1) or (5) to a scheme involving private lending arrangements, it is necessary in each case to consider whether the terms, rates of return and other remuneration of the parties dealing with each other in relation to each step of the scheme are consistent with that which arm's length parties bargaining in their own self-interest would expect,” the Tax Office stated.
The ATO noted that the Tribunal’s conclusion regarding the identification of the 'scheme' for the purposes of subsection 295-550(5) is consistent with the ATO's view of the meaning of the term.
