Can my SMSF lend me money?
No. Your SMSF cannot lend you or any of your relatives money. Making this type of loan must be avoided: it’s not a way of legally accessing super early via an SMSF.
Section 65 of the SIS Act prohibits superannuation funds, including SMSFs, from providing financial assistance to members or their relatives.
The trustee or an investment manager of a regulated superannuation fund (SMSF) must not:
- lend money of the fund to:
- a member of the fund; or
- a relative of a member of the fund; or
- give any other financial assistance using the resources of the fund to:
- a member of the fund; or
- a relative of a member of the fund.
Breaching this provision could lead to an administrative penalty of 60 units ($12,600 per trustee) as well as disqualification from being a trustee of an SMSF and/or civil and criminal penalties.
Can my SMSF loan money to my business?
In general, loans to a business operated by members of an SMSF is prohibited and can result in the following administrative fines:
- Lending to members and relatives – 60 penalty units
- In-house assets – 60 penalty units
As at 1 January 2023 a penalty unit is $275, therefore each breach is $16,500 per trustee and penalties must be paid by the trustee personally (or on behalf of the corporate trustee) and not paid by the SMSF.
The ATO has more information on how they deal with non-compliance on their website.
There are however certain loans to a related party business that can be made under strict conditions that will not breach these tight rules provided they are correctly put in place. Having your SMSF make a small loan to your business may be a way of legally accessing super early via an SMSF.
The key restrictions are:
- The loan is made to a company or a trust with a corporate trustee (not to a sole trader business or partnership)
- The amount of the loan is less than 5% of total fund assets (based on market value)
- The loan is on arms-length commercial terms
- The loan is allowable under the trust deed of the SMSF and is included as part of the investment strategy of the SMSF
- The loan does not breach the sole purpose test
In many cases, a loan of less than 5% of the assets of the SMSF may not be a significant amount. For an SMSF with a $1 million balance, this only equates to $50,000 which may not be enough for a business owner to survive through an extended business disruption.
One key risk with a 5% loan is what happens when the market value of assets of the SMSF drop, and the loan increases to greater than 5% of the assets of the fund. Where the value of the loan to the related party (i.e. the in-house asset) exceeds 5% of the assets of the fund at the end of the financial year, the trustee(s) of the SMSF must put in place a written plan to rectify the excess by the end of the next financial year.
For example if a loan is made of $50,000 in April 2020 (based on market value of total SMSF assets of $1 million) however the value of all assets drops to $900,000 as at 30 June 2020, before 30 June 2021 the trustees must reduce the loan amount to under 5% again – i.e. the $50,000 would need to be reduced to less than $45,000 to prevent the investment being considered an in-house asset.
Interestingly, based on our research and interpretation ‘total assets’ of an SMSF does not include an loan under a limited recourse borrowing arrangement (LRBA), so an SMSF with a $1 million commercial property with a $600,000 loan outstanding would have total assets of $1 million, not $400,000 as the net asset amount.
In addition to the 5% limit for a loan from an SMSF to a related party, another key aspect that must be complied with is ensuring the loan is at arms-length – i.e. the same rates, repayments and security as a loan from an unrelated lender. It is the responsibility of the trustee to be able to prove to the independent auditor of the fund as well as (potentially) the ATO as regulator that the loan is on arms-length commercial terms.
Different types of loans will have different characteristics and applicable interest rates. For example an unsecured loan for working capital purposes will attract a higher interest rate compared to a loan secured against real property or tangible business assets such as equipment or vehicles.
Ensure the loan agreement, loan schedule and ancillary documents such as mortgages and registered charges are all correctly documented and executed. Wherever possible automatic monthly principal and interest repayments should be set up from the business to the SMSF bank account the same as a loan from a third party lender would be.
In addition, the loan must be allowable under the SMSF trust deed, as well as included as part of the investment strategy of the fund meaning both of these documents need to be reviewed and updated where necessary.
The sole purpose test is also important. Essentially, the sole purpose for an SMSF is to pay retirement or death benefits to members or member beneficiaries of the fund. If a loan is being made to a related party company or trust, and then that money is subsequently paid out to the members of the SMSF or used to benefit them directly in anyway, the sole purpose test is likely breached and the trustee(s) may face significant penalties and compliance action from the ATO.
Kris Kitto is the Founder of Grow SMSF