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Hi,
There is a potential first year fund for audit which has entered into an unsecured loan ($120k) to an unrelated party at 12% p.a. during the latter half of FY23. The loan has been repaid in full before the end of FY23. From my understanding, there could be s62 and s109 questions to be raised. However, since the loan has been repaid in full in the same FY, would there be any contraventions to be lodged should s62 and s109 not be met? If yes, these would be marked as rectified.
What would be an appropriate audit evidence to satisfy s62 sole purpose test? Declaration from the trustees?
Would div7a rates be acceptable for s109 purposes? I believe not as credit card rates for comparable unsecured loans would need to be considered? Would we have an approx interest rate range, 18%-21%?
Thank you
Hi Yuvraj
As a positive the loan has been repaid.
The loan at 12% to an unrelated party may be able to be considered to have been done on an arm's length basis and there not be a breach of section 62 or section 109 of SIS subject to your review of the documentation to support the loan. You would need to review the loan agreement / trustee minutes / investment strategy to review if section 62 and section 109 have been complied with.
My view is that an arm's length interest rate does not have to be based on Division 7A rates or on credit card rates.
An unsecured rate should be based on what rate could be found in the market. Refer the below website that gives a range of rates for unsecured loans.
Thanks
The Auditors Institute