I am currently conducting an audit of an SMSF for the 2022 financial year. The total assets in the SMSF amount to approximately $800k as of the end of 2022. During the 2021 financial year, the trustee of the SMSF signed a contract to purchase an off-the-plan investment property in South Australia.

According to the contract of sale, the SMSF was initially required to pay a deposit of only $1000. However, in addition to the deposit, the trustee also transferred $249,000 to the builder, which represents 50% of the total contract price. The builder is currently utilizing these funds for their business operations. The accountant has advised me that this practice is common in new builds, and the SMSF will receive interest at the time of settlement, with the additional funds paid in advance being settled accordingly.

Upon review, I believe that this arrangement is not conducted on commercial terms. Generally, the deposit is supposed to be held in the trust account of the real estate agent and It appears to be a loan extended to the builder, with the amount paid and interest accrued being settled at the time of settlement. . For this arrangement to comply with regulations, the trustee of the SMSF and the builder should have a separate loan agreement in place, based on commercial terms. Failure to do so may breach regulations such as S.62 (sole purpose test), S.109 (non-arm's length dealing), and R4.09 (consideration to be given to the investment strategy, including risk and reward assessment). Looking forward to the feedback