The Commissioner for Taxation on the 17th September 2010 issued Interpretative Decision  ATO ID 2010/162 dealing with rates of interest on loans by members to self managed superannuation funds in instalment warrant situations.

The issue put forward was whether a superannuation fund contravenes s109 of the Superannuation Industry (Supervision) Act 1993 of it borrows money from a related party on a limited recourse basis on terms favourable to the fund.

Money was lent by a member to the members fund. The interest rate charged by the member was lower than the rate an arm’s length lender would charge. Apart from the interest rate charged the borrowing is on arm’s length terms and conditions.

The test put forward by the Commissioner in determining arms length under the terms of s109 is whether the terms are more favourable to the member – not the fund.

The interest rate, then, charged by the member to the fund may be less than the market would charge.