Have your clients with SMSFs loaned money from their fund? If so, remind them to make sure that the loan terms comply with the law and are in the best interests of their retirement.
The ATO is concerned some trustees are lending money from their fund to people who provide advice or assist in the running of the fund. This may not be in the best interest of the SMSF, and may place retirement savings at risk. When a loan agreement is not in the best interest of a SMSF – for example, giving discount loan rates or favourable terms – this could have serious consequences. In addition to putting member’s benefits at risk, the SMSF could be found to be non-complying and would, therefore, not qualify for concessional tax rates.
Before lending any money, your client should consider the fund’s investment strategy and determine whether the investment is appropriate and, in particular, whether lending money to people providing you with services or advice is in the best long-term interests of the SMSF. The ATO recommends SMSF trustees seek advice before entering into such arrangements.
If the trustees go ahead and lend money from the SMSF, they should write an appropriate loan agreement and have it signed by all the parties involved and ensure the loan agreement specifies all the terms of the loan, such as:
- what the security for the loan is
- the repayment period
- when repayments will be paid
- the amount of the repayments
- the interest rate.
They also need to ensure the interest and repayments are received by the fund according to the loan agreement, take appropriate action to protect the fund’s investment if the loan agreement is not followed and ensure the loan is sensible and does not put the members’ benefits at risk. Clients also need to ensure that the conditions of the loan agreement do not provide the borrower with favourable terms.
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