Whether or not to loan out money is a problem that most Self Managed Super Funds (SMSFs) face at one time or another, and while the loan itself may eventually benefit members, it can also have far-reaching consequences if money is lent to the wrong person.
It is important to make sure that the loan is in the best interests of member retirements, as well as being entirely legal. When a loan agreement is not favourable to members, perhaps because of discount loan rates or lenient terms, the agreement can adversely affect the SMSF.
Not only do you risk putting your members’ benefits at risk, you also risk your SMSF’s compliance with Australian Taxation Office (ATO) rulings. For an SMSF to be found non-complying it faces harsh ATO penalties by way of a loss of entitlement to concessional rates of tax and even the possible disqualification of a trustee.
To avoid such penalties, and to retain your complying status, a SMSF must ensure that all dealings by both parties are above board and transparent; ideally a written loan agreement must be signed by all involved parties.
When writing up this loan agreement, be sure that it lays down the terms of the loan in detail; specifying the security for the loan, the agreed repayment period, the repayment schedule, the number of repayments to be made within the time allotted, as well as the interest rate.
Having detailed the specific dates and rates for the loan, be sure to adhere to the terms. If repayments are not made at the organised time, and no alternate payment arrangement has been organised, take appropriate action to protect the fund’s investment. A loan which is not repaid as agreed will only damage member retirements.
Lastly, ensure that the loan is realistic; do not provide the borrower favourable terms, do not lend amounts which exceed the fund’s capabilities, and do not lend to individuals who will be unable to follow the loan agreement. If you choose to go ahead with the loan, the transaction itself must be legal, while the agreement must be thorough and succinct.
Should you have any doubt as to whether or not lend money, it is best to speak to a professional. We here at Lockwood and Ward are more than happy to provide all the information necessary to make those tough decisions so feel free to give us a call on (02) 9299 7044.