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Phuong Hoang Thi Ngo

Jul 19, 2021

SMSF LENDING TO UNRELATED TRUST

in SMSF Technical Forum

A SMSF lending 150K in 2020 FY (99% balance of SMSF) to Mr X & Mrs Y ATF A trust (have the loan agreement from lawyer, loans is also listed in Investment Strategy section of Trust Deed ) but the Trust only pay interest 2% every year and will pay principal by 7 years as loan agreement. There is no loan mortgage . I also have a look Indicator Lending rates of ATO 2020 is 5.37%

1/ Please give me your ideas whether any issue for breach super law in this case

2/ There are Trust Deed & Investment Strategy allow, loan agreement, confirm balance from Borrower, trustees signed for unrelated party Borrower. Please show me any document that I need ask more for audit

Much appreciate for your help asap

2 comments

Comments (2)

Phuong Hoang Thi Ngo

Jul 20, 2021

Thanks a lot

THE AUDITORS INSTITUTE

Jul 19, 2021

Hi Phuong

As a positive you have requested the normal paperwork that you would request for a loan. As the loan is to a Trust I would be also requesting a copy of the Trust's latest financial statements to assist in determining if the Trust has the ability to repay the loan. The Trust accounts may also help to determine if the trust is a related party or not.

In terms of the compliance audit, I would consider the following sections / regulations of SIS:

1) Section 62 - sole purpose test. An interest rate of 2% sounds low for a loan but given most bank term deposit rates are around 0.3% - 0.6% it may be reasonable.

Given that there is no mortgage in place this would be of concern to me. I would want an explanation as to why there is no mortgage in place given the relatively low interest rate especially given the loan term of 7 years.

2) Section 82 - 85 - in-house asset (IHA) rules. Your heading suggests the loan 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 trust 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 mortgage in place this would be of concern to me. Also of concern as stated above is the relatively low interest rate and the term of 7 years.

In relation to the above compliance concerns I would be requesting an explanation from the trustee as to:

i) why is there no mortgage 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) on what basis was the loan lent for 7 years?

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