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A SMSF has made a Private Loan to unrelated Party with no security with an interest rate of 1% over a 5 year period . A proper loan agreement has been drawn up and executed. I intend to do a qualification and lodge a report based on Sec 109 Dealings at arms length. Interested in others opinion on this as previous Auditor didn't have a problem with transaction.
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Hi Simon
Yes I agree with Gino. My main comment is that there may be other sections / regulations that you also qualify on & raise in your ACR. I would also consider doing a Part A qualification if you have concerns re the ability for the loan to be repaid.
In terms of the compliance audit, I would consider the following sections / regulations of SIS re such a loan:
1) Section 62 - sole purpose test. Does the loan meet the sole purpose requirements?
Given that there is 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? You note it is not 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 given that 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 trustee as to:
i) why is there no 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).
In relation to diversification (at 55% of Fund's assets) you can qualify on this if the trustees have not considered diversification as part of their investment strategy.
The audit report states in relation to regulation 4.09 re the investment strategy that "the fund trustee has an investment strategy, that the trustee has given consideration to risk, return, liquidity, diversification, the insurance needs of fund members, and that the fund's investments are made in line with that investment strategy. No opinion is made on the investment strategy or its appropriateness to the fund members."
Thanks
SMSF AAA
Contravention in my opinion and needs to be renegotaited on "normal commercial basis". That amount of loan with no security would warrant interest on Personal Loan Rates.
Hi Simon,
In my opinion the loan interest being charged is not on a normal "commercial basis". Even in the current low rate environment, I doubt any Bank would lend at 1.00% interest rate. The repayments and loan term must also be on a normal "commercial basis"Also, you haven't mentioned the amount of the loan. This is important to also determine whether the amount would be available from any Bank without security. A contravention report would be apprpriate and action taken to "restructure" the loan on a "noemal commercial basis". Keep in mind the TRust Deed as well as Investment Strategy must allow the Fund to lend.