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I have a SMSF audit. The fund has net assets of $264219. It has made a loan to a 3rd party of $260000. The is documentation in place & property as security for the loan. My concerns are:
The loan document is in the name of only one of the trustees. The SMSF has taken out a caveat against this property but the issue still remains that the loan documentation has not been properly executed & only in the name of one of the trustees.
The other issue is that in essence the SMSF has invested 98.42% of its assets in this investment, placing it in a difficult cash flow position. The fact that there is a caveat against the property is useful, but my concern is that the fund has placed itself in a difficult position. If funds are required urgently they may not be available, as this would possibly rely on the disposal of the property. My major concern is that this may have implications on the sole purpose test.
Please advise the best way in your opinion to deal with this situation.
Hi Andrew
Re the loan being only in 1 of the 2 trustees name you would need to consider if there is a breach of regulation 4.09A of SIS that requires assets "must be held separately from any assets held by the trustee personally". Arguably if the loan is in the name of the Fund this regulation may not have been breached so it maybe a management letter issue that is raised in relation to the loan agreement not being in both trustees names in trust for the Fund.
Other members may have a view on this.
In relation to such a high % of assets being in 1 investment my view is that if they have a correctly prepared investment strategy & the investment agrees with this (& complies with SIS) then normally there would not be a breach of the sole purpose test. As an example they may be planning on making additional contributions to improve the liquidity position.
Reg 4.09 of SIS requires "Trustees must formulate, regularly review and give effect to an investment strategy for the fund".
The investment strategy under this regulation must consider:
"(a) the risk involved in making, holding and realising, and the likely return from, the entity's investments, having regard to its objectives and expected cash flow requirements;
(b) the composition of the entity's investments as a whole, including the extent to which they are diverse or involve exposure of the entity to risks from inadequate diversification;
(c) the liquidity of the entity's investments, having regard to its expected cash flow requirements;
(d) the ability of the entity to discharge its existing and prospective liabilities;
(e) whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund."
Again, other members may have a view on this.
Thanks
SMSF AAA