Related Party Loans to SMSFs: “Show me the money”: Townsends Business & Corporate Lawyers
No proper loan → no actual borrowing → no in-house asset → non-compliant
Journal entries or set offs clearly do not meet the requirements of a loan
Townsends Lawyers are finding that some trustees are ignoring the rules on SMSF borrowing from related parties and treating it as a paper transaction rather than a real loan.
“When a related party decides to lend (or on-lend) money to the trustee of the fund they must be cautious to ensure that the loan is conducted in a manner which is not only acceptable under s109 of the SIS Act but is actually a ‘loan’ rather than a ‘financial accommodation’ (SMSFR 2009/2). It has to be a properly documented loan and actual funds have to be paid over by the lender,” said Peter Townsend.
It is imperative that if a related party is to make a loan that the actual money is transferred out of their account, presented at settlement as payment on behalf of the SMSF trustee and then received by the Vendor in satisfaction of part or all of the balance owing on the property. Journal entries or set offs do not meet the requirements of a loan or borrowing.
The consequences on the limited recourse borrowing arrangement if the related party loan is found to be a financial accommodation rather than a loan (borrowing) is that the holding trust may fall outside the exception provided by s71(8) which excludes the holding trust from being considered an in house asset. The whole transaction could be non-compliant.
Section 67A of the Superannuation Industry (Supervision) Act 1993 requires that there be a borrowing of money applied to the acquisition of a single acquirable asset as part of the limited recourse borrowing arrangements (‘LRBA’).