Hi Dharam

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

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? 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 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