Overview

The key message in the ATO statement is that trustees of SMSFs should not lend money, or pursue investment strategies, which are not in the SMSF's best interests.

What do trustees need to bear in mind?

The ATO says that trustees of SMSFs need to be wary of lending to people who provide advice or assist in the running of the SMSF. Presumably, the ATO is concerned with the influence of these people over SMSF trustees and the closeness of the trustees' relationship with them.

Additionally, lending money is another way to invest the SMSF's money — so all other trustee duties apply. Here are some things we recommend you take into account if you, or your clients, are considering lending from an SMSF:

• The investment strategy of the SMSF

The SMSF needs to have an investment strategy that includes the ability to lend. Trustees must to be careful when making investments on behalf of the SMSF to ensure that those investments comply with the SMSF's strategy, and any loan is not on terms which are likely to place the members' benefits at risk.

Lending is an authorised investment under clause 61 of the Cleardocs SMSF Trust Deed.

• Lending to related parties — the prohibition

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.

So, what sorts of loans by the SMSF are allowed?

The ATO does not give a lot of guidance about what sort of loans SMSF trustees can make. However, the terms of the loan need to be reasonable, meaning its terms must be standard terms for the sort of loan it is. If you're in doubt, seek legal advice.

Although the ATO does not give any guidance in its statement about what is and isn't 'reasonable', an example of what is likely to be unreasonable is a loan which places the members' benefits at risk.

What does the ATO advise, if anything?

The ATO recommends being judicious and careful when lending from the SMSF. It advises that trustees should do the following things if they do decide to lend:

• write up the loan agreement and have it signed by all parties involved;
• make sure that the loan agreement specifies all the terms of the loan, for example:
• what the security for the loan is;
• the repayment period;
• when repayments will be paid and the amount of those repayments; and
• the interest rate;
• make sure the interest and repayments are received by the SMSF in accordance with the loan agreement; and
• take appropriate action (which may include legal action) to protect the SMSF's investment if the loan agreement is not followed.

Flow-Chart of SMSF Lending

Here's a flow-chart about lending money from an SMSF (assuming that the SMSF has cash available to loan):

Further information

Click here to read the ATO's statement.

More information from Maddocks

For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Commercial Team.

More Information from Cleardocs

For more information about the Cleardocs SMSF package, see here. You can order an SMSF online from that page.

Read a summary of the SIS Act in-house assets rules here in our earlier ClearLaw article.

[1] Section 65 of the SIS Act.