Have you, or your clients, lent money from a self-managed super fund (SMSF)? Or thinking of doing so? There are rules about lending arrangements which an SMSF Trustee can enter into on behalf of the SMSF.
Here are the key pointsMelissa Ramov, Maddocks Lawyers
The key message is that SMSFs cannot lend money or provide direct or indirect financial assistance from the fund to a member, or a member's relative (e.g. an SMSF cannot guarantee a personal loan for a member).
SMSFs can lend to parties that are unrelated to members e.g. a friend of a member - but it must comply with the relevant rules. SMSFs should not lend money, or pursue investment strategies, which are not in the SMSF's best interests.
Trustees of SMSFs cannot lend money to members of the SMSF or their relatives.1
The ATO has stated that the following actions, amongst others, are regarded as lending to related parties, and are therefore prohibited:
Trustees can lend to other parties but the loan terms must be on arm's length.
The ATO says that trustees of SMSF's need to be wary of investing funds (ie lending) into an unrelated trust which then on-lends the funds to a member of the SMSF or a relative of the member.
This form of arrangement attempts to circumvent the prohibition on SMSF trustees lending money to a member or relative of a member and may be regarded by the ATO as a breach of super laws.3
Additionally, one must remember that lending money is simply 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.
Generally, an SMSF can make loans to related parties other than a member or relative, but the loan is regarded as an 'in-house asset'. This means that there are also strict rules in relation to these loans - including that the value of these loans, which constitute an investment, cannot comprise more than 5% of the value of the SMSF's assets.
The in-house asset rules in Part 8 of the Superannuation Industry (Supervision) Act 1993 also contain provisions which address arrangements designed to circumvent the rules, and specific anti-avoidance provisions in relation to schemes with the intent of artificially reducing the market ratio of in-house assets.
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 the Cleardocs SMSF Trust Deed - see the 'Authorised Investments' clause of the deed.
The ATO does not give a lot of guidance about what sort of loans it considers that SMSF trustees can make. However, the loan must be in the best interests of members (and not place the member's benefits at risk) and comply with the fund's investment strategy. The loan should also be conducted on a commercial, arm's length basis, in accordance with section 109 of the SIS Act.
Striking the right terms for the loan, particularly where related parties are involved, is essential. For example:
You should be judicious and careful when lending from the SMSF. You should seek legal advice before an SMSF Trustee lends. Generally, trustees should do the following things if they do decide to lend:
make sure that the loan agreement specifies all the terms of the loan, for example:
Here's a flow-chart - which in very general terms - describes the process for lending money from an SMSF:
|Does the SMSF have an investment strategy, or one that includes lending money?|
|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?|
|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?|
|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?|
|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.||The loan terms then need to be settled on commercial terms so that the investment made by the SMSF in making the loan meets the requirements of the Fund and superannuation law.|
|Proceed to next step||Proceed to next step|
Consider the 'reasonable' loan terms:
|Proceed to next step|
Document the loan agreement, and include the following terms:
|Proceed to next step|
Document any security for the loan:
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.
You can read earlier ClearLaw articles on a range of topics, such as:
Andrew is a Partner in the Maddocks Tax & Revenue team.
Andrew provides advice on:
His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Andrew was a tax consultant at a Big 4 Chartered Accounting Firm.
The legal information and commentary on this site is general only. Documents ordered through Cleardocs affect the user's legal rights and liabilities. To assess their suitability for the user, legal accounting and financial advice must be obtained.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.