Related Party Loans

A related party loan is where the Members of an SMSF act as the Bank towards the Fund. They will lend money to the SMSF instead of a Bank. A line of credit mortgage can be used for Members to obtain the Loan in their personal capacity and then on-lend the money to the SMSF. The typical structure is set out below:

The structure for the related party loan can be more cost effective because there is no legislative requirement to set up a Corporate Trustee and a Custodian Trustee. The related party loan can be simply held by the Bare Trust/Custodian Trust with Individual Trustees. Unlike a related party loan, if the SMSF intends to buy properties with bank loans, a Corporate Trustee and a Custodian Trustee are required to be set up by most Banks.

When we set up the related party loan structure for your SMSF, we will provide you with all the necessary documentation and also a loan schedule showing the loan details and the monthly repayment.

Arm’s Length & Commercial Terms

It’s important to ensure the terms of lending to the SMSF are on an arms-length basis and issued on commercial terms. This means the Members need to charge a reasonable amount of interests on the loan to the SMSF. There is a school of thought that argues zero % interest related party loans is acceptable, however we believe this could put the Fund in risk as the transactions are not on an arm’s length basis.

Safe Harbour Provisions

The Tax Office has recently published a practical compliance guidance (PCG 2016/5) which sets out the recommended interest rate and the loan terms (called ‘safe harbour’ terms) for a related party loan. For SMSF Trustees with Limited Recourse borrowing arrangements (LRBAs) which do not meet the ‘safe harbour’ terms in the practical compliance guidance cannot be assured that the Commissioner will accept the arrangement to be consistent with an arm’s length dealing. However, this does not mean that the arrangement is deemed not to be on arm’s length terms. It merely means that there is no certainty provided under the practical compliance guidelines. Trustees will need to be able to otherwise demonstrate that the LRBA was entered into and maintained on terms consistent with an arm’s length dealing. Please note a sample loan repayment schedule here:

Sample Loan Repayment Schedule

An SMSF cannot lend money to a related party

Although the Members of an SMSF can lend money to their Super Fund, the SMSF cannot give a loan to a related party. It is regarded as providing financial assistance to Members and breaches the Sole Purpose Test. Please see the ATO video below for more information:

SMSF Loans & Early Access

For details on the structure to be set up for the Bank Loan, please refer to this page.

  • Leesey Aung

    Dear Sir,
    Can SMSF lend money to member on arm length and commercial terms?
    Thanks

  • superannuationwarehouse

    Leesey,

    Under no circumstances can an SMSF lend money to a member or do any financial assistance to a Member or a related party of the Memebr. This include any family membersof the Member..

    The reason for this is the Sole Purpose Test – each investment has to be done for the sole purpose of the retirement benefit objective. More here:
    http://www.smsfwarehouse.com.au/smsf-investments/sole-purpose-test/

    Thanks

  • Leesey Aung

    Thanks and noted.

  • Mike

    We are considering a SMSF to purchase a property.

    As we don’t have enough in our SMSF to buy outright, we are looking at other options.

    I notice on your website you mention :

    · Trustees can also lend to the SMSF, so it’s possible to do it without a bank

    Do we need to go through the expense of setting up the bare trust if we simply lend the money to the SMSF ?

    (We would be doing a redraw on our current home loan)

    • superannuationwarehouse

      Mike,

      You can do a loan to your SMSF. In effect, you become the bank to your Fund. This is called a related party loan.

      The lender (you) will not require two Pty Ltd companies to be set up over the SMSF and Custodian Trust. So the requirements are less stringent. But the SMSF cannot have any loans within the SMSF. This is a S67 prohibition. Therefore the need for a Custodian Trust.

      We have a lawyer that can set this up. Note this is a requirement to have it in place for the SMSF to be a compliant Fund.

      Please advise if you want us to proceed.

  • Szy

    Hi, I am about to set up my SMSF and roll funds into it, and I want to invest in a private company with this SMSF. There’s a short deadline to purchase (the shares) and given that the funds from roll-over may take a while, can I lend money (short term) to the SMSF to buy the shares as the SMSF and then recoup the loan once the rolled funds arrive? I need the loan repaid as I need that loaned amount (to remain outside the SMSF) for another venture.

  • Graham Fidler

    Hello Hein,

    I want to make sure I have been clear on what I would like to do here….

    I want by SMSF to make a loan to a related party of the fund. The load would be from the SMSF to the related party on arms length commercial terms and the loan amount would be under the 5% in-house asset rule.

    I wanted to clarify as your web link referenced a related party loaning money to the SMSF.

    I am wanting the SMSF to make a loan to the related party.

    Is your advice that this can still be done if we are under the 5% in house asset ruling and the loan in on arms length commercial terms.

    Thank-you,

    Graham

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Superannuation Warehouse is an accounting firm and do not provide financial advice. All information provided has being prepared without taking into account of the Trustees’ objectives, financial situation or needs. Because of that, Trustees are advised to consider their own circumstances before engaging our services.

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