Can I borrow money from my super fund or SMSF?

16 September 2014

The ATO has an article, SMSF and Lending, on their website warning trustees about the dangers of lending an SMSF?s funds to the wrong person. This includes yourself, your own business, someone who advises you or a family member or friend.

Unfortunately 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. This is in fact the most common breach, accounting for over 25% of contraventions reported to the ATO by fund Auditors each year and is illegal.

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 essential fact to know is that Trustees of SMSFs cannot lend money to members of the SMSF or their relatives[1]. However, trustees can lend to related parties of the SMSF, subject to the ‘in-house asset’ rules. The SIS Act limits investments in ‘in-house’ assets (which includes loans to related parties) to 5% of the total assets of the SMSF, based on current market value.

If someone is recommending you set up a SMSF and then to lend them or a related party money for a development or business deal, you have to ask yourself in whose best interest are they working? It might be time to scrutinise the small print and legality of this “great opportunity”.

So when would a loan agreement not be seen to be in the best interest of your SMSF? An example would be where you have given discount loan rates. 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 or since July 2014 the ATO also have the ability to apply penalties on each Trustee of up to $10,200 per infringement.

So you should consider your fund?s investment strategy and determine whether the investment is appropriate and that any acceptable loans are on commercial terms.

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: ensure the interest and repayments are received by the fund according to the loan agreement
    • what the security for the loan
    • what is the repayment period
    • when repayments will be paid
    • the amount of the repayments
    • the interest rate
  • 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.”

Regardless of how badly you need short-term funding or how much you trust the person you are considering lending to, you need to stop and think or get professional advice. Don?t be in a rush or be embarrassed about taking your time to check the legalities. Later is often too late to get your funds back and hindsight can be a cruel tormentor.

[1] Section 65 of the SIS Act.

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