The latest Australian Taxation Office (ATO) Q & A guide has brought good news for members of self managed superannuation funds (SMSFs) wanting to use gearing to acquire assets, in regard to the treatment of interest payments.
In July, the ATO declared its conditional acceptance of capitalising the interest payments made on borrowings for SMSFs.
“The ATO has come out and said if the original principal was used to acquire an asset, we are going to view capitalisation of the interest merely as a cost of acquiring that asset,” DBA Butler lawyer Bryce Figot said.
“So draw down of principal to pay interest is okay,” he said.
In regard to personal guarantees associated with SMSF borrowings, the regulator is yet to reveal its final position.
There has been an indication the ATO is moving closer to acceptance as long as the guarantees are limited and do not breach the limited recourse requirement under the law, according to Figot.
“The inside word we are getting is that this is one aspect where the ATO may cave and allow personal guarantees but it is a bit of a ‘watch this space’ for the time being and there is still a bit of risk to what it might do,” he said.
In addition the ATO remains concerned about SMSFs investing in development projects, regardless of whether or not the funds invested have been borrowed.
On this subject, borrowing funds to finance a development may not fit the legal definition of acquiring an asset.
