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This article is more than 24 months old and is now archived. This article has not been updated to reflect any changes to the law.

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ATO provides warning on SMSFs which lend money (NOT borrow money)

Have you, or your clients, lent money from a self-managed super fund (SMSF)? Or thinking of doing so? The Australian Tax Office (ATO) recently warned SMSF trustees about lending arrangements that they enter into on behalf of the SMSF.

Here are the key points from the ATO.

Emily Millane

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):

Does the SMSF have an investment strategy, or one that includes lending money?

Yes

No

Proceed to next step

Develop an investment strategy, which includes the capacity of the SMSF to lend

Does the SMSF trust deed allow the trust deed to lend money?

Yes

No

Proceed to next step

Amend the trust deed so the SMSF has the power to lend money

Is the SMSF allowed to loan moneys to the proposed borrower?

Yes

No

Proceed to next step

If the borrower is a member or relative of the SMSF, then section 65 of the SIS Act prohibits lending to them

Is the permitted borrower a 'related party' of the SMSF?

Yes

No

Then the in-house asset rules under the SIS Act apply. Only 5% of an SMSF's assets may be represented by in-house assets.

There is no defined limit on the loan amount

Proceed to next step

Proceed to next step

Consider the 'reasonable' loan terms:

  • The loan terms need to be standard terms for the sort of loan that it is; and
  • The trustees of the SMSF must invest with other parties on arm's length terms (see Section 109 of the SIS Act)

Proceed to next step

Document the loan agreement, and include the following terms:

  • 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.

Proceed to next step

Document any security for the loan:

  • If the borrower is a corporate borrower then a fixed and floating charge over the assets of the company;
  • Guarantees; and
  • Mortgages as security for performance of the loan, or a guarantee.

Further information

Click here to read the ATO's statement.


Essential superannuation resources

Stay on top of the never ending changes affecting superannuation with the following resources from Thomson Reuters: The Essential SMSF Guide and the Australian Superannuation Handbook. Available in book, ebook and online.

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

You can order an SMSF online from Cleardocs.

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

[1] Section 65 of the SIS Act.

Last revised on : 22-06-2023
 

Lawyer in Profile

Julian Smith
Julian Smith
Partner
+61 3 9258 3864
julian.smith@maddocks.com.au

Qualifications: BA, LLB, Monash University, LLM, University of Melbourne

Julian is a Partner in Maddocks Commercial team. He advises a diverse range of clients across the Australian commercial and financial services landscape.

Julian's corporate practice spans various sectors, including financial services, professional services, and family-owned enterprises. He advises on:

  • capital raising,
  • disclosures,
  • restructures,
  • mergers and acquisitions,
  • corporate governance,
  • directors' duties, and
  • trusts, corporations, and securities law.

Julian's financial services practice involves advising financial market participants on the entire financial services lifecycle including fund structuring, management options, and compliance with regulatory requirements.

Julian also offers guidance on alternative and disruptive financial services businesses, such as online foreign exchanges, internal markets, and management rights schemes.

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