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SMSF lending strategy

Discussion in 'Superannuation, SMSF & Personal Insurance' started by NickM, 22nd Jan, 2008.

  1. NickM

    NickM Co-founder Staff Member

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    I was asked yesterday if the following scenario would work

    SMSF has $100K cash

    SMSF lends $100K to a non related party & charges 10% interest pa

    Non related party on lends to a member or associate at 10% pa

    Would this be acceptable ?

    Answer : It would be deemed an In House asset. To remain complying this amount must represent less than 5% of the total assets of the fund.

    S71 of SIS act provides a definition for in house assets.
    S71 (2) specifically addresses this issue


    SECTION 71 - MEANING OF IN-HOUSE ASSET

    Cheers
    NickM
     
  2. Rob G.

    Rob G. Well-Known Member

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    Just how far does the tracing go ?

    Obviously the in-house assets test should not be defeated by interposing an entity.

    But what about if the SMSF has a term deposit with a bank AND fund member has an overdraft at the very same bank ? Providing the bank manager is not complicit in the arrangement this would obviously not be a problem.

    That is the problem with the SIS - it does a lot of deeming without careful drafting.

    Cheers,

    Rob
     
  3. Redwing

    Redwing Well-Known Member

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    Just wondering- What kind of surety would you get for that loan?
     
  4. NickM

    NickM Co-founder Staff Member

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    Hi RedWing
    probably none. We didnt get that far after we got through S 71

    Rob, get your point & and a fair example, but i think it comes back to knowledge & blatant arrangements such as my example.

    Cheers
    NickM
     
  5. DaveA

    DaveA Well-Known Member

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    Hi Nick,

    New example

    I have a SMSF with corp trustee with a 100k cash (i am the only member and am a sole director in the trustee).

    I decide to lend the 100k @ 10% to a company which my a parent who is the only share holder. They then use this to invest with (forget the cgt issue with using a company). The parents have no connection to the SMSF so would this get cought in the in house asset test. I dont think so but would be great to have some clarification...

    Would the answer change if the company was not wholy owned by my parents and was 50% owned by them and 50% by my partner? (my understanding it would be cought friom 71(1a))

    Be fantastic to hear your opinion on this one...
     
  6. Rob G.

    Rob G. Well-Known Member

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    SIS does not allow related parties to transact - even on arm's length commercial terms (unlike Tax Law).

    A closely held private company in which an associate holds an interest or were directors would be a related party by my guess.

    A widely held private company in which any associates COLLECTIVELY hold an non-controlling interest might be OK ???? Depends on whether any director is an associate as well.

    Just my impressions.

    Cheers,

    Rob
     
  7. NickM

    NickM Co-founder Staff Member

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    Hi Dave
    We need to look at S70B & S70C and the definition of Part 8 associates. In your example it would be regarded as an inhouse asset.

    Rob is on the mark re the control issue.
    Last time l looked into this topic, 25% or less ownership by associates in order for it not to be regarded as an in house asset.

    NickM
     
  8. DaveA

    DaveA Well-Known Member

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    yes i agree its the associate definition which does it (should of looked myself before running and asking)....

    if only we could find friends which are trust worthy enough to lend 100k to with out any worries.... damn government and there rules...

    thanks for the interesting topic though, wish there was more like these..
     
  9. kenbeth

    kenbeth New Member

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    SMSF lending question

    If SMSF lent 5% of the total SMSF valuation to a member for 1 year at RBA Cash Rate +2% and the SMSF member pays the loan of monthly would this be acceptable to ATO ??

    Hard to find a simple answer on the ATO site.
     
  10. Rob G.

    Rob G. Well-Known Member

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    In the absence of any more information ... sounds like a breach of the sole purpose test.

    The sole purpose is to provide benefits for its members in retirement.

    The 5% in-house assets rule does not permit you to do as you please with 5% of the super funds.

    Cheers,

    Rob

    Cheers,

    Rob
     
  11. kenbeth

    kenbeth New Member

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    thought it did will contact ato on monday to confirm thanks

    cheers ken
     
  12. AsxBroker

    AsxBroker Well-Known Member

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    Hi Nick,

    I've heard that alot of lenders in the market ask for Directors Guarantees which is against SIS act? Is this your understanding as well?

    Cheers,

    Dan
     
  13. NickM

    NickM Co-founder Staff Member

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    Kenbeth, a couple of issues
    1. Investment strategy must allow for it
    2. what security wil the fund have ? ie will you lend the money to an unrelated party on the same terms ?
    3. Sole purpose test must be considered but i think if you comply with in the inhouse asset rules + your inv strategy allows for it + you have some security - it will probably pass.

    HI ASX re the dirs guarantees it is actually a taxpayer alert TA 2008/5

    TA 2008/5 - Certain borrowings by self managed superannuation funds

    it is not law but merely their view. Most mortgage brokers & banks will argue exactly this, however I can actually understand why the ATO have taken this line and at this point in time have told any of my smsf clients that are considering this type of product to avoid pers guarantees.
    I have met with one lender who has such a product but as a result it is not cheap

    My recommendation to anyone considering this is to explore all other options first then if they decide to proceed to ensure they receive a compliance letter from their accountant or better still the auditor of their fund. a couple of lenders that are on the mark are asking for this anyway. After all the lender will be quite exposed if the fund becomes non complying.

    Fun huh

    Cheers
    Nickm
     
  14. AsxBroker

    AsxBroker Well-Known Member

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    Hi NickM,

    The Tax Alert is saying to me that the ATO aren't quite sure whether or not it will "meet the conditions in subsection 67(4A) and/or breach other provisions of the Superannuation Industry (Supervision) Act 1993 (SIS Act), as well as related superannuation rules."

    Sounds like a typical regulator not quite sure of which view they should be taking. I remember when TTR/NCAPs started and the ATO wasn't sure, I think it took them a good year to advise everyone that it was ok and they weren't going to prosecute in relation to Part IVA.

    We'll just have to keep an eye out and see if they make up their mind.

    Cheers,

    Dan
     
    Last edited by a moderator: 13th Oct, 2008
  15. Rob G.

    Rob G. Well-Known Member

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    On a strict legal interpretation, the giving of a guarantee means the loan is not a limited recourse form.

    Since SMSF Directors are members this is even more so.

    Cheers,

    Rob
     
  16. MattR

    MattR Well-Known Member

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    I can see where the ATO is coming from, the loan may be non-recourse but if the personal gaurantee was to be triggered by the bank on a member, this could in turn trigger financial hardship for the member and super is then accessed.

    As an aside, its a bit much some of the lenders asking for these guarantees when you see the costs involved, the high interest rates and the LVR's involved.
     
  17. AsxBroker

    AsxBroker Well-Known Member

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    Hi MattR,

    I agree, I have heard that one loan (which doesn't get directors guarantees) is 11.7% pa for interest plus some small set up costs. After thinking this was expensive I remembered that most credit cards are mid to high teens (albeit, we don't usually buy property on a credit card!).

    Cheers,

    Dan