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borrowing from a SMSF

Discussion in 'Superannuation, SMSF & Personal Insurance' started by shrek, 13th Aug, 2010.

  1. shrek

    shrek Member

    Joined:
    21st Jun, 2009
    Posts:
    13
    Location:
    Brisbane
    Hi All

    Last stupid question (before I make a stupid mistake), can a member of a SMSF borrow from the SMSF (less than 5%) and pay this back via commercial/legal arrangement with market rate interest?

    For example, Member B borrows from the SMSF 10K at 7% over 24 months, paid back monthly etc?

    Regards

    Shrek
     
  2. Superman

    Superman Well-Known Member

    Joined:
    6th Nov, 2007
    Posts:
    343
    Location:
    Gold Coast, QLD
    Shrek

    You can’t lend money or provide direct or indirect financial help (including the provision of credit) from your fund, to a member or a members relative as per Sec 65 of the SIS Act.

    In addition (Directly from the ATO):

    Generally, as a trustee of an SMSF you cannot lend to or invest in a related party or related trust of the fund, where the loans, or the values of the assets that are the subject of the investment or lease arrangement are greater than 5% of the market value of the fund's total assets.

    If your SMSF has in-house assets with a value of more than 5% of the market value of the fund’s total assets, you risk one of the following:

    * disqualification
    * the fund being made non-complying
    * a range of other penalties
    * the inability to purchase further in-house assets
    * prosecution.

    Section 71(1) of the SIS Act explains the meaning of an in-house asset.


    So, you can't loan to a member, but you can lend less than 5% to a related party such as a related trust or company provided it is on commercial terms and it is part of the investment strategy of the fund.

    Your big issue is what if the value of the other assets of the SMSF decrease (i.e. listed shares etc) and the loan becomes more than 5%?

    Although the ATO has recently said it would exercise discretion in this situation, as trustee you still need to put in place a plan to rectify the situation.

    I see where you are coming from - if you are paying interest to someone it may as well be your own SMSF rather than the evil banks, but the costs to seek professional advice and ensure you have the correct and complying loan documentation may outweigh the benefits.

    Personally, as a trustee I always ensure I know the line between what is an asset of my SMSF and what is a personal asset / investment - so even though I could lend some money out from my SMSF (say to my family trust), I don't because it starts to blur that line.

    I hope this provides some useful direction to you.

    Thanks
    SM
     
  3. shrek

    shrek Member

    Joined:
    21st Jun, 2009
    Posts:
    13
    Location:
    Brisbane
    further question

    Thanks so far for the answer, here is my example

    Say my fund has 250K in a Term deposit (plus contributions each month of $4k) for my investment stratergy for the next 3 years bearing very good interest. (7.5%)

    Forget all the legal paperwork setup etc (as I have that covered) can I do the following

    1. Lend 5% of the SMSF to a related party or trust (say in either members name) or another related party (family Member) at commercial interst rates over 3 years to help them get their business up and running? Given this is their first business and need a break to get things running (buy basic assets, car etc)

    I know this is complicated but I want to make sure I am compliant and also help a related member to get a head start.

    As my SMSF stratergy is in a term deposit I can see myself during the life of the loan being in a situation where the fund is non compliant due to the loan being more than 5% of the total.

    Thoughts?

    Cheers

    Shrek
     
  4. Superman

    Superman Well-Known Member

    Joined:
    6th Nov, 2007
    Posts:
    343
    Location:
    Gold Coast, QLD
    Shreka,

    You are correct - chances are that the in-house loan won't go above 5% if the capital is locked up in a term deposit.

    Having the money locked up also will (should) prevent you from being tempted to lend more than 5% to the related party.


    You will still need to organise a loan agreement for the 5% and keep it all at 'arms length' / market value - i.e. reasonable interest rates - even if the payment of interest is deferred to when the cash flow of the business can support it. I would even go so far as to register a charge over the company you are lending the money to which gives your SMSF more security (make the borrower pay the cost)


    Also - 5% x $200k = $10k - which is not much to start a new business - it is amazing how much money gets rapidly sucked up with even apparently 'simple' business start ups. I guess it is better than nothing - however you should ensure that you are not sacrificing your retirement savings for someone else.

    Do your due diligence and try to treat the whole deal as if you were not related - this will give you a better perspective.

    Good luck with everything
    SM