The ATO cannot stop an SMSF lending money. This is assuming it is in the best interest of the SMSF to lend money. Your SMSF may even lend money to a ‘related party’.
But the ATO wants you to treat your SMSF as a special delicate creature. It does not want you to see your SMSF as a racy business structure. We agree with the ATO.
Your SMSF invests and seeks to grow wealth. Lending money can achieve this. But tick these boxes before you lend the money:
It is possible for an SMSF to lend money to an unrelated third party. But, there are strict rules. Speak to your accountant before you do so:
The SMSF Loan agreement contains:
The SMSF loan agreement complies with:
There are additional rules when lending to a ‘related party’. Speak to your accountant first.
Your SMSFs cannot lend money to members or their ‘relatives’. See Section 65 Superannuation Industry (Supervision) Act 1993. Section 65 prohibits your SMSF providing financial assistance, such as a loan, to members or your relatives. See the ATO’s SMSFR 2008/1.
The Australian Tax Office (ATO) restricts SMSFs from lending money to a ‘related party’ of your fund. This includes any members of the fund, relatives and spouses of members, and business partners and employers of members.
The ATO prohibits any financial assistance of any kind from an SMSF to a related party. There are both moneary and criminal sanctions if you break this law.
So, if you get into financial strife, your SMSF can not bail you out with a loan.
A ‘relative’ of an SMSF member includes:
However, SMSF trustees can lend to some ‘related parties’ of the SMSF. This is subject to the ‘in-house asset’ rules. The SIS Act limits investments in ‘in-house’ assets. ‘In house’ asset include loans to related parties. The limit is 5% of the total assets of the SMSF. But this is based on SMSF’s on going day to day current market value. Market values change all the time. Be careful.
So we now know that the ATO restricts SMSFs from lending money to a ‘related party’ of your SMSF fund. This includes any members of the fund, relatives and spouses of members, and business partners and employers of members.
The ATO prohibits any financial assistance of any kind from an SMSF to a related party. If you breach the rule you lose half of your super in penalties and face criminal penalties.
The ATO defines a loan from an SMSF to a related party as an ‘in-house asset’. Other in-house assets include an investment in a related trust of your fund and an asset of your fund that is leased to a related party.
In-house assets cannot make up more than 5% of your SMSF’s total assets. Let’s say you have $2m in your SMSF. Most of it is in listed shares. You may be able to lend up to $100k to a related party. But if the following day the stock market crashes to 50% then you have lent 10% of your SMSF. You are in breach.
You may be able to lend money to a related party where:
While you can lend money to a related company or a family trust with a corporate trustee, you can never lend to a member’s:
There is nothing wrong with having a human being as a trustee of a trust. But, your SMSF should not lend money to a family trust which has a human as a trustee. And that trustee is a member or related to a member.
Your accountant, adviser and lawyer may feel Legal Consolidated is being overly conservative. But we like our clients to sleep at night.
For example, the ATO’s SMSFR 2008/1 strangely states:
Arrangements or transactions that do not contravene paragraph 65(1)(b)
Investing on commercial terms
217. If an SMSF invests on commercial terms in an unrelated entity and that unrelated entity, independently of the SMSF and in its own right and from its own resources, gives financial assistance to a member or a relative of a member the investment by the SMSF in that unrelated entity does not result in a contravention of paragraph 65(1)(b).
We are of the view that the ATO is wrong and reckless in this comment. We think there is a real risk that if the matter went to the Court, the Court would look at this as a breach of the law. The Courts care little with the ATO’s views of the world. The Court only considers what the law states. The Court does not consider what the ATO thinks the law means.
A Self-Managed Superannuation Loan Agreement is an agreement between a Lender (your SMSF) and a Borrower. This SMSF Loan Agreement is a formal way of setting out the terms and conditions of the loan.
The SMSF Loan Agreement addresses what the rights are of the parties, including:
1. the initial amount being borrowed
2. how it is repaid
3. any interest payable
5. right to use the loan to support mortgages, debentures, charges and PPSR registrations.
An SMSF operates through the SMSF trustee. The lender is the trustee of your SMSF. The lender may be a human or a company. For example:
Colin and Karen’s SMSF lending money to their Family Trust:
Smith Pty Ltd as trustee for the Smith Super Fund lends to the Smith Family Trust
The SMSF Loan Agreement allows you to lodge caveats, mortgages, PPSR, fixed & floating charges, debentures and encumbrances over the Borrower’s assets.
The SMSF as the Lender is authorised to direct the Borrower to sign all documents required to charge and register all the Borrower’s interest in:
a) land the Borrower owns or controls from time to time (this includes the right to lodge mortgages, equitable mortgages, Mortgages, caveats and other encumbrances of any nature whatsoever); and
b) other assets, fixtures, choses in action and chattels owned or controlled by the Borrower including by way of debentures, fixed & floating charges, mortgages, equitable mortgages, caveats, Personal Property Securities Register (PPSR) and share capital
A Guarantor promises to answer for the debt. This is if the Lender defaults on the Loan. If the Lender cannot or will not fullfil the obligations of the Loan (such as not pay the money) then the Guarantor is contractually obliged to fullil the obligations. This is under the SMSF Loan Agreement.
For example, the SMSF is going to lend money to Smith Stix Pty Ltd. The SMSF feels the company does not have many assets so it increases the interest rate and makes the director of the company be a Guarantor. If Smith Stix Pty Ltd fails to make good on the loan then the SMSF has recourse to the Guarantor.
If the trustee of the SMSF (as Lender) wishes, the Lender adds additional persons to guarantee the repayment of the loan.
There are two types of Lenders:
This SMSF Loan Agreement is for non-professional lenders.
In the movies, IOUs are often handwritten on a piece of paper. Sometimes instead of an SMSF Loan Agreement, someone does a ‘minute’. Both approaches fail. In Rowntree v FCT  FCA 182 shows the additional care required to document even simple related-party transactions, such as loans. In this case, the taxpayer, a practising NSW lawyer, claimed he borrowed over $4m from his group of private companies. The Court said:
‘Mr Rowntree has not deliberately chosen to ignore the law. His evidence presented to the Tribunal suggests that he genuinely believed that there were arguments to support his view that a loan was in existence.’
He failed. Only a legally prepared Loan Agreement satisfies the ATO, Bankruptcy Courts and Family Court. Only a legally prepared Loan Agreement supports mortgages and debentures.
The interest rate must be ‘commercial’. What would a bank charge? A bank ‘lends’ money through its credit card at say 17%. This is because it is unsecured. And there are no guarantors. But the same bank will lend the money at a lower interest rate if it is secured by real estate or a guarantor.
You need to talk with your financial planner and accountant as to what a ‘fair’ or ‘commercial’ interest rate should be.
Again the answe is ‘yes’ if that is commercial and usual. Banks often provide capital only loans. But they may charge a higher interest rate. Or they may charge a lower interest rate. They may be more likely to require a gurantor.
Are you acting in the best interests of the SMSF? Is capitalising the loan normal and commercial?
Speak to your financial planner and accountant.
1. Our letter of advice
2. SMSF Loan Agreement
Press the “Sample” button above to see a full sample of the SMSF Loan Agreement.
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SMSF Loan Agreement Document
If you do know but are paying it in instalments, then put it all in as one figure.
Otherwise, just put in the total figure. Remember to put in the dollar sign.
If you want it all paid back on the one date, just enter that date in.
If the SMSF is being paid back in instalments, you can word it how you like. for example
1) “Payable in instalments of 10% per calendar month”
2) “Half to be paid on 21 September 2030, and the remainder to be paid on 21 September”
3) “$100 to be repaid weekly for 10 weeks starting from 4 July”
1) If you are charging no interest, put the word “Nil”
2) If you aren’t sure what the interest rate is yet, leave it as the default, which is “as demanded from the lender from time to time”
3) You can put in a flat rate, for example, “5%” (don’t forget to put the % sign in)
4) Keep it variable, for example, “2% above the Commonwealth Bank interest rate”.
5) You can also use the inflation rate. You could word it something like “calculated according to the percentage increase in the Consumer Price Index (all groups) for the average of the capital cities of the Commonwealth of Australia. (As published by the Australian Bureau of Statistics or body that takes over that function.)”.