SMSFs cautioned on ‘strict conditions’ with SMSF lending
Where SMSFs are planning to lend money there are some important conditions to be aware of including who the money is lent to and the reason for the loan.
.
In a recent online article, Heffron managing director Meg Heffron said while its not particularly common for SMSFs to lend out money to earn interest as a fund investment, it may be permissible under the rules depending on who the money is lent to and what it is for.
“To start with, SMSFs can’t lend money to members or their relatives under any circumstances. Ever. It doesn’t matter that the arrangement might be a good retirement investment and might be entirely above board in terms of being on commercial terms. It’s just not allowed,” Ms Heffron cautioned.
“In fact, an SMSF can’t even give financial assistance to members or relatives. For example, my SMSF couldn’t lend money to say my friend on the condition that my friend then lent the same amount to me.”
However, Ms Heffron explained that an SMSF could lend money to a person or business completely unrelated to the SMSF members.
“In fact, SMSFs can even lend money to related parties. There is a long definition of exactly what a related party is but as a general rule, its people and entities (for example, companies) that are closely linked to the members and their relatives,” she noted.
“For example, a company or trust controlled by a member or even a member and their family would be a related party. Hence, an SMSF could lend money to a member’s family trust or their company.”
Ms Heffron explained that a loan to a related party is what is known as an in-house asset.
“In house assets are allowed but they are limited – any given fund can only have 5 per cent of its assets (by value) classified as in-house assets. So an SMSF that lends $100,000 to a member’s family trust could only do that if the fund was worth more than $2 million,” she said.
“If the loan was to a person or business completely unrelated to the SMSF members, this 5 per cent limit doesn’t apply.”
Regardless of who the money is lent to, its always important to make sure that the terms are entirely commercial, she added.
“This is especially important when there’s a close relationship between the SMSF members and the borrower – whether they are a related party or not,” she noted.
“For example, the arrangement should be put in writing, the interest rate should be commercial, the repayment period should be comparable to other lenders and the terms of the contract should be honoured.”
Ms Heffron said in some circumstances it may be appropriate for the SMSF to take assets or guarantees as security or charge the borrower more interest if the loan is unsecured.
“For example, if a bank lending to a family business would normally require directors’ guarantees, it would be appropriate for the SMSF to get the same. And if the loan fails, the SMSF trustee should pursue those guarantees just like a bank would,” she explained.
“The loan needs to comply with the sole purpose test. Regardless of who the money is lent to, the reason or motivation behind the loan must be to provide for the members’ retirement. Any other purpose, such as supporting a struggling business, will fall foul of the rules.”
Miranda Brownlee
27 December 2022
smsfadviser.com
Latest Newsletters
Hot Issues
- Getting to a higher level of financial literacy in Australia
- What is the future of advice and how far off is superannuation 2.0?
- Investment and economic outlook, April 2024
- Australia’s debt service ratio ‘extraordinary’: CBA
- Connecting an adviser with your children
- ACCC scam report
- The Shortest-reigning Monarchs in History
- ATO warns trustees about increasing crypto scams
- Aged care report goes to the heart of Australia’s tax debate
- Removed super no longer protected from creditors: court
- ATO investigating 16.5k SMSFs over valuation compliance
- The 2025 Financial Year Tax & Super Changes You Need to Know!
- Investment and economic outlook, March 2024
- The compounding benefits from reinvesting dividends
- Three things to consider when switching your super
- Oldest Buildings in the World.
- Illegal access nets $637 million
- Trustee decisions are at their own discretion: expert
- Regular reviews and safekeeping of documents vital: expert
- Latest stats back up research into SMSF longevity and returns: educator
- Investment and economic outlook, February 2024
- Planning financially for a career break
- Could your SMSF do with more diversification?
- Countries producing the most solar power by gigawatt hours
- Labor tweaks stage 3 tax cuts to make room for ‘middle Australia’
- Quarterly reporting regime means communication now paramount: expert
- Plan now to take advantage of 5-year carry forward rule: expert
- Why investors are firmly focused on interest rates
- Super literacy low for cash-strapped
- Four timeless principles for investing success
- Investment and economic outlook, January 2024
Article archive
- January - March 2024
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
January - March 2023 archive
- China’s economic rebound lowers the odds of a global recession
- No plans to extend NALI compliance relief, says ATO
- Why most investors want human advice
- Comparison: How Long It Takes To Decompose?
- Contribution caps to stay the same for 2023–24 year
- Three simple steps for financial wellness
- Draft super objective to ‘protect super from interference’
- Beating back inflation, but at what cost?
- Why superannuation fund fees matter
- 100 Most Influential people in the world.
- TBC set for double indexation from 1 July
- ATO issues fresh warning on illegal early access schemes
- When to be proactive about your portfolio
- Digital advice firm optimistic QAR will ‘reset financial advice’
- 2022 by the numbers
- ATO raises alarm on asset protection scheme for SMSFs
- Downsizer age reduction now in force
- SMSFs cautioned on ‘strict conditions’ with SMSF lending
- Countries with the highest GDP per capita between 1800-2040
- Transitioning into retirement: What you should know
- Auditor flags surprising traps with e-signatures and SMSFs
- A review of the last two decades in investing