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Understanding SMSF Loan Agreements & Compliance Requirements
 
 
   

Understanding SMSF Loan Agreements & Compliance Requirements

News | Navjot Kaur | Released: 27/02/2025 | Read: 3 Mins

In the ever-evolving landscape of Self-Managed Super Funds (SMSFs), understanding the intricacies of SMSF loan agreements and compliance requirements is essential for providing your clients with sound advice. This newsletter aims to clarify key considerations regarding SMSF lending, ensuring that you can guide your clients effectively while remaining compliant with the Superannuation Industry (Supervision) Act 1993 (SISA).
   

The Importance of SMSF Loan Agreements
   

Under Section 65 of the SIS Act, SMSF trustees are prohibited from lending money or offering financial assistance to members or their relatives. However, lending to related parties is permissible, provided the total value of such loans does not exceed 5% of the fund’s market value. If this threshold is exceeded, trustees must develop a written plan under Section 82(2) of the SIS Act to reduce the in-house asset ratio within 12 months. Loans to unrelated parties must adhere to arm’s length principles.

Essential Compliance Factors for SMSF Lending 

 

To maintain compliance and avoid potential breaches, it is crucial for trustees to consider the following: 

  • No Lending to Members or Their Relatives: Section 65 of the Superannuation Industry (Supervision) Act 1993 (SIS Act) prohibits the trustee of an SMSF making a loan to a member or a relative, or providing other financial assistance using the resources of the SMSF 

  • Limits on Loans to Related Parties: Loans must not exceed 5% of the SMSF’s asset value. 

  • Proper Documentation: A formal loan agreement must be established to confirm the legitimacy of the loan. 

  • Arm’s Length Terms: Loans must be structured with commercial interest rates and repayment terms (Section 109, SIS Act). 

  • Timely Repayments: Interest and principal repayments should be made before the end of each financial year. 

  • Security for Unrelated Party Loans: Mortgage or caveat protections may be required. 
   

Legal and Regulatory Considerations
   

Many SMSF auditors require formal loan agreements and often recommend securing the loan with a caveat or mortgage over the borrower’s assets. Additionally, stamp duty may apply to certain loan transactions, depending on state legislation. It is advisable for SMSF Administrators and trustees to seek independent legal advice to ensure compliance.

 

Next Steps for Accountants Advising SMSF Trustees 

Given the complexity of SMSF lending rules, it is essential for accountants to ensure that their clients: 

  1. Obtain suitable accounting and legal advice.

  2. Understand the implications of lending to related and unrelated parties. 

  3. Maintain accurate documentation and records for compliance and auditing purposes. 
   

Can an SMSF Lend Money?
   
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Before your clients proceed with lending money, ensure they address the following: 

  • Investment Strategy: Does the SMSF’s investment strategy allow for lending? If not, it should be updated. 

  • Trust Deed: Does the SMSF Deed permit lending? If not, necessary updates should be made. 

  • Compliance: Ensure the SMSF Loan Deed is compliant with SIS regulations before any lending occurs.
   

Lending to Related Parties
   

When it comes to lending to related parties, additional rules apply. SMSFs cannot lend money to members or their relatives, as outlined in Section 65 of the SIS Act. Breaching this rule can result in severe penalties, including loss of half of the superannuation balance and potential criminal sanctions.
   
   

What is an SMSF Loan Agreement?
   

An SMSF Loan Agreement is a formal document that outlines the terms and conditions of the loan, including: 

  • The amount borrowed 
  • Interest rate and repayment terms 
  • Security for the loan 
  • Guarantors, if applicable 

Conclusion 

Navigating SMSF loan agreements demands meticulous attention to detail and strict adherence to legal requirements. It is essential to engage in proactive discussions to ensure compliance and effectively safeguard the interests of the SMSF. By doing so, you can help clients navigate these complexities with confidence and clarity.  
   

Create your SMSF loan agreement instantly with Trustdeed
   

Follow the below simple instructions to create your SMSF loan agreement for just $275 (incl GST): 

  • Click here to login to your Trustdeed account or Click here to Register now 
  • Go to SMSF Tools – Select option '' or 'SMSF Loan Agreement'. 
  • Fill out the application form and you will receive the following documents instantly.
   
   
   

Visit www.trustdeed.com.au for more details or call us on (02) 9684 4199
   

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