Loans issued by an SMSF

An SMSF can make loans to external parties (i.e. not borrow money), provided the loan agreement is in the best interest of the SMSF. Make sure the loan terms comply with the law and you are not lending money to Members or relatives of the Fund.

Here is a checklist for an SMSF to lend money:

  • The SMSF Investment Strategy and Trust Deed must allow for lending.
  • Can not make a loan to a related party. Section 65 of the SIS Act prohibits lending to them.
  • When lending to a related party, the in-house asset rules under the SIS Act apply. Only 5% of an SMSF’s assets may be represented by in-house assets.
  • Ensure the terms of the loan is reasonable:
    • The loan terms need to be standard terms for the sort of loan that it is; and
    • The trustees of the SMSF must invest with other parties on arm’s length terms (see Section 109 of the SIS Act)
  • Have a loan agreement is place setting out the terms of the loan:
    • What the security for the loan is;
    • The repayment period;
    • When repayments will be paid and the amount of those repayments; and
    • The interest rate

     

For more info about the arm’s length in an SMSF, please see the ATO video below.

 

Loan Repayment Schedule

Download a template to be used here:

Download a Loan Schedule Template

 

For more rules and guidance on how to run an SMSF, see the ATO guidance booklets page.

 

  • Aussie Business

    I’m looking at three scenarios currently and wanted to know if your SMSF setup allows these investments:

    1) Loan from SMSF to a Pty Ltd company, where I am a director/sole owner
    a. We were looking to borrow from the bank, but would rather pay the interest to my own
    SMSF
    2) Purchase of a classic car for investment
    a. I currently personally own a classic car which is an appreciating asset. I would look to
    sell it to the SMSF.
    3) Purchase of shares in a private unlisted company
    a. My Trust purchased and currently holds the shares and I would look to move it across
    to the SMSF
    b. I am not a director and own less than 1% of the companies.
    Thanks!

    • https://www.smsfwarehouse.com.au Superannuation Warehouse

      Aussie,

      When an SMSF makes an investment, you are not allowed to gain a current-day benefit. Or a perceived benefit. This principle is referred to as the Sole Purpose test.

      With this in mind, I can answer your questions as follows:
      1) Loan from SMSF to a Pty Ltd company, where I am a director/sole owner
      a. We were looking to borrow from the bank, but would rather pay the interest to my own SMSF – can’t do this, only loans to a party or entity where you or your related parties do not have an interest.
      2) Purchase of a classic car for investment
      a. I currently personally own a classic car which is an appreciating asset. I would look to sell it to the SMSF. – 2 issues here, an SMSF can only purchase listed shares and commercial property from you or a related party, so it can’t purchase car. Also, a car is classified as a collectible and the SMSF must ensure the item. More guidance here:
      https://www.smsfwarehouse.com.au/smsf-investments/artwork-investments/

      3) Purchase of shares in a private unlisted company
      a. My Trust purchased and currently holds the shares and I would look to move it across to the SMSF
      b. I am not a director and own less than 1% of the companies. – an SMSF can purchase unlisted shares, but not from a related party or an entity you own. You can therefore not sell from a Trust you control to the SMSF:
      https://www.smsfwarehouse.com.au/smsf-investments/shares/

      Be mindful you comply with ATO rules when operating an SMSF in order to keep in compliant.

      • Aussie Business

        Thanks for the answers! Are there any restrictions for the SMSF to purchase shares directly from the same private unlisted company above?
        Does your SMSF deed allow for these investments?

        • https://www.smsfwarehouse.com.au Superannuation Warehouse

          Aussie,

          The Deed and Investment Strategy must allow for investments in private companies. The standard investment strategy we issue is compliant in this regard:
          https://www.smsfwarehouse.com.au/smsf-investments/strategy/

          The SMSF will receives a share certificate noting how many shares it owns. Make sure the SMSF and its related parties do not have a controlling interest in the company as an SMSF can’t run a business.

  • Kumar Parveen

    Hi There
    My Friend is a builder who has also a SMSF.
    I am engaging him to build my investment property.

    Can I borrow money from his SMSF ?

    Please advise.

    Thanks

    • https://www.smsfwarehouse.com.au Superannuation Warehouse

      Kumar,

      If your friend will give the SMSF a loan – its a great friend to have.

      Make sure you do a loan repayment schedule and a bare trust.

      PS – where can I get a friend like this.

      • Kumar Parveen

        Hi There
        I guess I was not clear.

        I am building a house through a friend’s construction company. He is also the director of this construction company.

        I am coming short on my funds. in house construction.

        This friend / Builder of mine has his established SMSF and some funds are sitting idol.

        Can his SMSF lend money to me even though his company is also building my house.

        Whats your view on this.

Contact Details


logo-grey

Peace Of Mind

We are Melbourne based with clients throughout Australia. Our SMSF administration service is mostly paperless. This enable us to charge a fair fee, resulting in a good value-proposition for you.

No Advice

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