What TD 2016/16 covers
TD 2016/16 is an ATO tax determination dealing with self-managed super funds (SMSFs) that borrow money under limited recourse borrowing arrangements (LRBAs) on non-commercial terms, often from a related party.
The determination explains that if an SMSF could not or would not have entered into a loan on genuine arm's length terms, the income the fund earns from the asset bought with that loan counts as non-arm's length income (NALI). Income classified as NALI is taxed at the top rate rather than concessional super rates.
The worked example
The ruling includes a detailed worked example involving a $1 million property purchase funded by a related-party loan with 0% interest and no repayments. The example concludes that because the SMSF could not have met real-world loan terms - including deposit, interest, and repayments - all the rental income from the property becomes NALI.
Document history
This document was first issued on 28 September 2016. It has since been updated into a consolidated version reissued 19 October 2026 incorporating an Addendum. The determination applies to income years both before and after its original issue date.
Key actions
- If an SMSF has a limited recourse borrowing arrangement with a related party (for example a fund member or their business), the loan terms - interest rate, repayment schedule, loan-to-value ratio and term - can be checked against normal commercial lending terms.
- Practical Compliance Guideline PCG 2016/5 sets out the ATO's 'safe harbour' terms that SMSF trustees can use to show their LRBA is on arm's length terms.
- Where an SMSF could not have serviced a genuine commercial loan, because of insufficient deposit or cash flow to meet real repayments, specialist SMSF tax advice can be sought, as the fund's income from that asset may be taxed as non-arm's length income at the top rate.
- This determination does not cover the 2024 changes to non-arm's length expenditure rules, which are covered separately in Law Companion Ruling LCR 2021/2, or the new restriction that LRBAs entered into on or after 10 August 2026 for real property must be for business real property. Both of these can be checked separately when setting up or varying an LRBA.
This is a plain-English summary for information only, not legal or compliance advice. Always check the official source or consult a qualified professional.