SMSFs and Member Loans: Why Lending to Yourself Breaks the Rules
Lending money from an SMSF to a member or a member’s relative is strictly prohibited and triggers an immediate breach of section 65 of the Superannuation Industry (Supervision) Act 1993.
The rules make it clear that a fund cannot lend to a member or to any individual who falls within the SIS Act’s definition of a relative—including the broader extension under section 17A, which reaches as far as cousins. Any such loan is automatically treated as an in-house asset because it represents a loan to, or lease with, a related party of the fund.
A recent example involved a couple operating a farming business in their personal names. They had arranged a $300,000 unsecured personal loan from their SMSF to themselves, charging eight per cent interest. Both members were in their early seventies. Despite claiming they had received written advice from a global accounting firm confirming compliance, they were unable to provide any evidence of that advice.
On the SMSF balance sheet, the loan appeared as business real property supposedly linked to a company. However, the company could not produce a loan document to support the arrangement. This structure represents a breach of section 65, making the loan an in-house asset and also breaching section 71. In practice, this means the couple will need to unwind both the loan and the asset. There may also be further issues if they are attempting to claim an interest deduction personally while earning tax-free income in the fund.
The scenario suggests the arrangement may have been part of a broader scheme.
Proper advice would typically have directed the couple to run the farming business through a company or trust and have the SMSF lend to that entity—within the strict five per cent in-house asset limit. Interest must also be appropriate and commercial. If the rate is excessive or non-arm’s length, the fund risks its earnings being taxed at the penalty rate of 45 per cent.
While the precise arm’s length rate cannot be confirmed here, the example raises multiple compliance red flags and underscores the need for SMSF trustees to avoid any arrangement that resembles lending to members.
SMSF lending rules are complex and breaches can be costly.
If you’re unsure if your fund’s arrangements comply, speak with our Intuitive Super SMSF Specialists before making any decisions.
Source: https://www.smsfadviser.com/lending-money-to-members-will-breach-smsf-compliance-adviser/
