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Self Managed Super Funds

SMSFs lending money to members and related parties

Specifically prohibited in the Super laws is SMSF’s lending money to members of the fund and their relatives.  Trustees must understand that providing financial assistance to members and their relatives is not allowed.

This is because the close nature of the parties involved can mean the lent money is at risk of being removed from the super system, whether through default of repayment (both capital and interest) or illegal early release.

Related parties of a Self Managed Super Fund include:

The Australian Taxation Office has now placed their attention on this area of SMSFs.  It has become a major focus of the ATO given that approximately 25% of all breaches reported to the ATO by SMSF auditors involve such loans.

The ATO are right to be concerned when a SMSF is lending money without a proper loan agreement which ensures that the loan terms are compliant with the law and that it is in the best interests of your funds’ sole purpose test which is to provide for your retirement.

It is of the utmost importance that, before a SMSF lends money, its’ Trustees and members should consider the funds’ investment strategy and determine whether the investment is appropriate and in the best long term interests of the SMSF.

It is wise to seek professional advice about making these types of investment choices before entering into such arrangements.

In addition, the ATO advises that “you should:

The related party transaction provisions within SMSF regulations are complicated, and to many Trustees and members they seem needlessly complicated.  Unfortunately, before they were included in the legislation, trustees tended to abuse related transactions for personal gain. The easiest solution for the regulators would be to strictly prohibit any type of related party matters, however this would be overly restrictive within a well run fund.

Basically, if the transaction you are considering involves other people or entities you are related to, be careful.  Even if you are able to proceed with the transaction, you may be subject to limitations concerning the size of the transaction relative to the size of your fund. You will also have to consider whether you have made similar types of transactions in the past, and the effect this has on the current deal under consideration.

So it’s not an easily understood part of the law, which may explain why it is also one of the most common compliance issues the Regulator deals with.  However, if you understand it, you will find there is a fair degree of flexibility which you may find beneficial.

Remember it is you the Trustee that is ultimately responsible for running your SMSF, and you must make sure you understand your duties, responsibilities and obligations.

Do not underestimate the value of good advice from a qualified, experienced SMSF specialist advisor should you require advice in this complicated area of SMSF legislation and rules.  Hindsight is a cruel tormentor when facing loved ones having lost your retirement nest egg.

Paul Baggetta, Founding Partner and Principal of Baggetta & Co, has been a Taxation Accountant for over 32 years, a Financial Planner since 1998 and in 1983 qualified as a Real Estate Licensee holding a Triennial Certificate (currently not trading), and operated his own Real Estate business for over 5 years as a second business.

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The information provided on this website, including the material and contents provided in the website publications, are informative in nature only and you should not act specifically on the basis of this information alone. It should not be used as a substitute for legal, business, accounting, tax, financial planning or other professional advice. If expert assistance is required, professional advice should be obtained.

Paul Baggetta is the Founder & Principal of Baggetta & Co. Paul Baggetta has been a Taxation Accountant since 1981, a Financial Planner since 1998, and in 1993 qualified as a Real Estate Licensee, holding a Triennial Certificate (currently not trading) and operated his own Real Estate business for property investment clients for over 5 years as a second business.

Financial planning services are provided by Paul Baggetta as an Authorised Representative (No. 261469) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. Australian Financial Services License No. 223135.

 

Taxation & Accounting services are provided by Paul Baggetta as a Registered Tax Agent (No.61487008) and is a Member of SMSF Association, FIPA & NTAA.