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Jason G

Jan 28, 2024

Non-Payment of Arm's Length Loan

in SMSF Technical Forum

Hi,

I am auditing a fund that has lent money to an unrelated party. The loan agreement set out the loan terms, namely interest rate, frequency of principal and interest repayments, along with an amortisation schedule. I am satisfied that the interest rate is a market-based, arm's length rate.

In FY23, the borrower only paid interest, no principal payments. They are behind on payments if we are to go by the amortisation schedule.

It appears no new documents/revised agreements have been executed to reflect an interest only period.

My questions are:

Might this be a breach of arm's length rules?
Are there any other compliance regulations to take into account in assessing this situation?

Thank you.

1 comment

Comments (1)

THE AUDITORS INSTITUTE

Jan 29, 2024

Hi Jason

Yes it could be a breach of section 109 the "arm's length" requirement if the loan has been changed from principal and interest to interest only if there is no documentation to support this change. I would expect that there should be correspondence or minutes to support the change in the terms of the loan.

Other compliance sections of SIS to consider are section 62 of SIS that requires the fund be maintained for the sole purpose of providing retirement benefits. You should also consider SIS Regulation 4.09 that requires the trustees to have an investment strategy in place. Re the investment strategy you would need to consider whether having a loan that is interest only will meet the requirements of the investment strategy.

Thanks

The Auditors Institute