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The SMSF has a loan to a private company.
The private company has 3 shareholders, each shareholders holds 1/3 of the shares and 1/3 of voting power. The SMSF member is one the shareholder. The 3 shareholders are also directors of the company, they are unrelated parties.
The SMSF lent 3 loans to the private company, each loan amount is around $100k. The company is carrying on a lending business and on-lend the loans to 3rd parties. The private company's operation getting into trouble when 3rd parties defaulted loan payments. The private company requested to written off the 2nd loan and promised the other 2 loans' repayment are not affected.
The SMSF trustees made decisions to written off the loan as the trustee considerate:
· any legal action taken in regard to the loan would only cause a negative financial position on the borrower and would ultimately put the remaining 2 loans in jeopardy
· there is no financial benefit in taking legal action in regarding with this loan. It would simply lead to funds being spent in legal costs when for no financial gain
Please advise:
1. On what circumstance that a loan can be written off in a SMSF?
2. What documents should be required for audit in this situation?
3. Any audit issues should be alarmed in this case?
Hi Linda
A similar issue has been raised previously.
Yes, a loan can be written off in a SMSF if it is non recoverable.
There are a number of issues to consider re the loan. In relation to the write off of the loan I would request documentation to support that there is no ability to collect the loan. Further there should be documentation to support what action the trustees have taken to try & collect the loan. If the loan was made in accordance with SIS then possibly there is no contravention even if the loan is written off. In terms of the compliance audit and whether there has been a breach of SIS and an auditor contravention report being required, I would consider the following sections / regulations of SIS:
1) Section 62 - sole purpose test. Does the loan meet the sole purpose requirements? If there was no security in place this would be of concern to me. I would want an explanation as to why there is no security in place and how the trustees have satisfied the sole purpose test.
2) Section 82 - 85 - in-house asset (IHA) rules. Is the loan to a related party? If the loan is to an unrelated party the IHA rules will not be breached. You would need to obtain paperwork to support that the borrower is not a related party. 3) Section 109 - arm's length rules. Investments must be made on an arm's length / commercial basis. Again if there is no security in place this would be of concern to me. In relation to the above compliance concerns I would be requesting an explanation from the trustees as to:
i) was there any security in place? ii) how was the interest rate determined? iii) what due diligence was done in relation to the borrowers ability to repay the loan? iv) does the Fund's investment strategy allow for such an investment to be made? Once you have obtained an explanation to the above queries that may assist in whether you need to qualify the compliance audit (and lodge an audit contravention report). Thanks SMSF AAA