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Shalendra Pillay

Mar 25, 2021

Lending Money

in SMSF Technical Forum

· On 7th August 2019 the SMSF have invested $290,000 by way of loan to XYZ at 9% interest per annum.

· Loan documents were done however there is no security documents in place for this loan.

· Total assets of the fund is $328,633.53.

· Total loan equates to 88% of the fund’s assets.

· We were informed by the trustees on 15th December 2020 that the trustee are in process of arranging paperwork to document security.

· On 17th March 2021 we were provided with bank statements showing that loan have been paid back with interest.

· Loan was unsecured for the period of approximately 18 months.

· While the investment strategy covers this loan & the interest is high, I have seen that the loan has been repaid with the interest, but there is an issue of 88% of funds asset invested by way of loan without any security.

As an Auditor what I am suppose to do?

1 answer0 replies

Comments (1)

THE AUDITORS INSTITUTE

Mar 25, 2021

Hi Shelendra

This is again a question that I believe different auditors may have different views on.

My view is as follows:

Firstly the fact that there was no security over the loan is not a breach by itself. A Fund could make a loan on an unsecured basis as there is nothing in SIS that requires it. Arguably the higher interest rate is because of the loan being unsecured.

However an auditor re the loan would need to consider the following sections / regulations of SIS as to whether there is a breach:

1) Section 62 - does the loan meet the sole purpose test?

2) Section 65 - was the loan to a member / relative (or was financial assistance provided)?

3) Section 82-85 - Were the in-house asset rules complied with?

4) Section 109 - was the loan made on an arm's length / commercial basis?

5) Reg 4.09 - Did the investment comply with the Fund's investment strategy?

If you are of the view that the loan was not made on an "arm's length" / commercial basis then this would be a breach of section 109 & you would need to qualify section B of your audit report & lodge an audit contravention report (ACR).

As you stated the trustees were arranging security after the loan was made this may suggest it was not made on an "arm's length" basis.

As the loan has been repaid this is a positive. If you are satisfied that there has been no breaches of SIS my view would be that you would still need to raise a management letter raising your concerns (re no security) with the Trustee.

Thanks

SMSF AAA