All loans, including those from related parties, friends and families, should always be supported by a formal loan agreement and relevant security.
Loan and security documents are important not only to secure repayment of money lent but, in particular for SMSFs, having a formal loan agreement and registered mortgage is one of the requirements of the ATO’s practical compliance guidelines 2016/5, which provides trustees certainty that their related party loan arrangement is at arm’s-length.
The cost of having loan documentation prepared outweighs any non-arm’s-length income tax bill from the ATO for SMSFs.
If a loan from family members is not properly documented, this can lead to disputes as to whether or not the money was a loan or gift at the outset and can also leave the lender in a vulnerable position.
There are a number of different loan and security documents, including:
- related party loan agreements including a mortgage for SMSFs entering into limited recourse borrowing arrangements
- commercial loan agreements and associated security documentation (such as personal guarantees, security agreements).
Even if there is an extremely remote chance of the borrower defaulting on the loan, no-one can predict the future, so always back your money with formal loan documents with security such as a registered mortgage or an unregistered mortgage and a caveat.
Natasha Ng
Solicitor
Townsends Business & Corporate Lawyers
02 8296 6207
natasha@townsendslaw.com.au
www.townsendslaw.com.au