It Depends – Can my SMSF make loans? – Retirement, Superannuation & Pensions

n this edition of ‘It depends’, partner Scott
Hay-Bartlem talks about whether your SMSF can make loans and how
the answer differs depending on whether the borrower is related or
unrelated.

Video transcript

Hello and welcome to this edition of It Depends. I’m talking
about whether my SMSF can make loans.

Can my SMSF make loans?

So, this is our first ‘It depends’. Now, part of the
question is going to be around is the borrower related or
unrelated?

What if the borrower is unrelated?

Where the SMSF is making a loan to someone who is not
technically a related party, the rules are somewhat simpler because
a lot of the restrictions don’t apply. However, in every case
with every investment, the trustee of the SMSF must be satisfied
it’s a proper investment for the SMSF, that’s the prudent
person test. We have to make sure it complies with the investment
strategy. It’s got to be on, you know, normal commercial
arm’s length terms as to repayments and interest and guarantees
and security and those kinds of things.

What if the borrower is related?

Now, where the borrower is a related party of the SMSF, we have
a number of specific restrictions we have to deal with. So, the
first one, a lot of people know about are the in-house asset rules.
Now, an in-house asset includes a loan to a member or a related
party of a member. So, if our SMSF loans any amount to a member or
a related party, it will be an in-house asset. We can have up to 5%
of the value of the fund’s assets in in house assets. So, we
need to check to make sure we pass that 5% rule. It’s not an
absolute prohibition. But what is often missed is that there’s
another provision in the super rules, Section 65, and that says
that an SMSF cannot make a loan to a member or a relative or give
other financial assistance using the resources of the fund. So,
even though you might have a loan to a member, which is an in-house
asset and under the 5%, we still can’t do it because we have a
breach of Section 65. And that’s going to include loans to
members or relatives directly. But because of that other financial
assistance part of the rules, it’s also going to stop us making
loans to other related entities where our members or our relatives
are going to benefit from it.

Is that it?

So, there are a few technical restrictions aimed at loans to
related parties. There’s a couple of other things still to
think about. One is the sole purpose test. So, our SMSF must be
maintained for the sole purpose of providing retirement benefits to
members and not for other purposes and our members and their
families and their related entities must not benefit
pre-retirement. So, a lot of times loans to members and other
entities of theirs are attacked as a breach of the sole purpose
test. So, that’s something we have to be careful of. We’ve
still got those prudent person, is it an appropriate investment and
investment strategy type rules sitting there as well, as I
mentioned earlier. But there’s also going to have to prove that
we’ve made the loan on normal commercial terms. So, what would
an arm’s length bank do? Would they make the loan at all? What
would the interest rate be? It would be documented. Would there be
guarantees? Would there be security? If we don’t get all of
those things right with the related party loan, even if we sneak
through one of the specific prohibitions, we still have problems
with compliance for our SMSF. Now, there’s lots of issues
around loans out of SMSFs.

They’re just a couple to mention today to bear in mind, if
you’d like more advice or have more questions about loans from
SMSFs, then please contact one of our specialist SMSF advisors.
Thanks for watching this edition of ‘It depends’.

©
Cooper Grace Ward Lawyers

Cooper Grace Ward is a leading Australian law firm based in
Brisbane.

This publication is for information only and is not legal
advice. You should obtain advice that is specific to your
circumstances and not rely on this publication as legal advice. If
there are any issues you would like us to advise you on arising
from this publication, please contact Cooper Grace Ward
Lawyers.