Is your SMSF lending money to someone?


Is that loan in your SMSF’s best interest?

The Tax Office issued an information sheet on their website last November warning trustees about the perils of lending an SMSF’s funds to the wrong person. This includes your own business, someone who advises you or a family member or friend.

An all too common occurrence is the practice adopted by some people of withdrawing funds from their SMSF to “temporarily” help keep their business afloat when cash flow is tight.

Has your SMSF loaned money? If so, you need to make sure the loan terms comply with the law and are in the best interests of your funds sole purpose test which is to provide for your retirement.

The boys and girls at the ATO are rightly concerned some trustees are lending money from their fund to people who provide advice or assist in the running of the fund. This may not be in the best interest of your SMSF, and may place your retirement savings at risk. If someone is recommending you set up a SMSF and then to lend them or a related party money for a development, you have to ask yourself in who’s best interest are they working? Might be time to scrutinise the minute details of this “too good to be true one time only opportunity”.

So when would a loan agreement not be seen to be in the best interest of your SMSF ? Basically, when you have given discount loan rates or favourable terms – this could have serious consequences. Here is one example they give:

 when you have given discount loan rates or favourable terms – this could have serious consequences. In addition to putting your member’s benefits at risk, your SMSF could be found to be non-complying and would, therefore, not qualify for concessional tax rates.

They advise that before lending any money, you should consider your fund’s investment strategy and determine whether the investment is appropriate and, in particular, whether lending money to people providing you with services or advice is in the best long-term interests of your SMSF.

If you are not sure about making these types of investments choices, they recommend that you seek advice before entering into such arrangements.

If you still decide to go ahead and lend money from your SMSF, the ATO advise that “you should:

  • write an appropriate loan agreement and have it signed by all the parties involved
  • ensure the loan agreement specifies all the terms of the loan, such as:
    • what the security for the loan
    • what is the repayment period
    • when repayments will be paid
    • the amount of the repayments
    • the interest rate
  • ensure the interest and repayments are received by the fund according to the loan agreement
  • take appropriate action to protect the fund’s investment if the loan agreement is not followed
  • ensure the loan is sensible and does not put the members’ benefits at risk
  • ensure that the conditions of the loan agreement do not provide the borrower with favourable terms.

Remember that you are the one ultimately responsible for running your SMSF, and you must make sure you understand your duties, responsibilities and obligations.”

With regards to taking funds out to help your business, you need to firstly know that should the business go under that your Superannuation is in most cases protected in bankruptcy from creditors so you should be careful about accessing this protected asset.

Regardless of how much you trust a person even if they are your accountant, lawyer, financial planner, mortgage broker or best mate, you need to get independent third-party advice. Don’t be embarrassed about not completely trusting the promoters scheme as it is often too late later to get your funds back and hindsight is a cruel tormentor when facing loved ones having lost your retirement nest egg.

For further information on the issues raised in this blog please contact our Castle Hill SMSF Centre or Windsor Financial Planning Office.

I hope this guidance  has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, put on your Facebook page if you found information helpful.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

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12 Comments

  1. Cyril

     /  September 27, 2017

    Hi Liam,

    I wanted to know bit more about lending money to 3rd party via SMSF. Is there a limit on it? what might be the complications in regards to it?
    Thanks

    Like

    Reply
    • No limits if you follow the rules but you should consider the need for diversification as a prudent trustee. Make sure that it’s on commercial terms in relation to rates, term, LVR, repayments, security taken for the loan and careful record kept of transactions. Always understand your exit strategies if one of the members dies and a death benefit needs to be paid and what if the loan goes into arrears or default.

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      Reply
  2. Alexander Buchanan

     /  May 24, 2016

    Hi Liam, I have an interest in a widely held property trust that is set up so 60% of the capital constitutes equity and 40% constitutes loans from unitholders. This is meant to provide the mechanism for the non-taxable component of the distributions to be passed to the unitholders, which is by way of gradual reduction of the loans. Can I transfer this into my SMSF?

    Like

    Reply
    • Hi Ben

      Sorry but that is a very specific question and my licence would not allow me to provide an answer to that in an online forum. I would suggest that your first port of call would be the Auditor of your fund as they will be the final decision maker as to whether it is an acceptable. I would assume that a lot may depend on the nature of the loan portion of the unit trust arrangment. If it is written so that the Lenders have a charge over the units of the trust until repaid then you may find that this is not acceptable as an SMSF can allow a charge over assets of the fund except through a Limited Recourse Borrowing Arrangement. Talk you to your Auditor and give them the full PDS and background.

      Like

      Reply
  3. Kamal

     /  April 11, 2016

    Hi Liam,

    Great article there. I am looking at the option of providing a loan from my smsf to someone (I do not know) provided he agrees to all the conditions. Would you know where I can I find an accountant who deals with loans through an smsf?

    Like

    Reply
    • Kamal

      Any SMSF accountant/administrator should be able to manage a loan account but you may need a decent lawyer to draft the Loan Agreement and supporting documents. I would suggest you contact your Superfund Deed provider or I use Townsend Lawyers to ensure you meet your Deed provisions.

      Like

      Reply
  4. Gerald Cleeland

     /  April 4, 2016

    Can I withdraw an amount below 5% value of my superfund to pay off some personal debts. I have $800,000 in super and need to pay an urgent account of $25,000. I have no other options in repaying this amount.

    Like

    Reply
  5. That is a really good tip particularly to those new to
    the blogosphere. Simple but very precise information… Thanks
    for sharing this one. A must read post!

    Like

    Reply
  6. Hi Liam,
    In our recent National Debt and Savings Barometer we found the primary driver for setting up and SMSF was a desire for greater control (54%). So it’s interesting to hear that for some the increased control could be their undoing. The loan agreement and seeking a second opinion are great suggestions to mitigate the risk. But how do differentiate between loan and investment? And how do you know what your fund is really being used for?

    Like

    Reply
    • Hello over there at RaboDirect.

      For most investment schemes they are required to have a Product Disclosure Statement or PDS which provides full details of the investment, who is behind it and how your ownership is recorded and the fees , charges and tax ruling attached to it.

      For a private investment you should receive either units in a Trust, shares in a Company which will hold title to the investments or a physical asset such as classic car or bar of gold. You should do your own due diligence as to how secure those units / shares are and what they actually represent if the deal failed. For example if you were going into a property development with say 10 others then you would expect to receive pro-rata units or shares in the entity owning the land component of the investment. If the deal fell through at least you would be entitled to your share of the value of the land.

      If you have received neither shares or units in an entity then you have effectively made a loan as you have not received any asset in return for your capital.

      This is a general summary and I would always suggest you have a third party review the terms of the offer for you.

      Like

      Reply
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