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SMSFR 2008/1 and loans to related companies

The trustee of a regulated superannuation fund is prohibited from lending money to a member of the fund (and/or a member’s relatives). However, what if the trustee lends to a related company of which the member is the sole director and shareholder?

SMSFR-2008-1-and-loans-to-related-companies

Subject to proper structuring this can be a viable strategy and even has ATO sign-off in self managed superannuation fund ruling SMSFR 2008/1.

Legislative framework

Section 65 of the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’) prohibits trustees of regulated superannuation funds from providing loans or any other financial assistance to fund members and/or their relatives.

Trustee for the R Ali Superannuation Fund and Commissioner of Taxation [2012] AATA 44 [54] provides insight into the meaning of ‘financial assistance’, stating:

Financial assistance is not defined for present purposes and the term therefore takes its ordinary meaning as affected by the context in which it appears. The term appears in the Act as part of a set of provisions whose object is to protect and preserve members’ superannuation savings. Arrangements that are designed to confer the benefit of use of superannuation fund moneys by members, whether directly or indirectly, fall within this concept of financial assistance.

The Commissioner is likely to agree with this view (see SMSFR 2008/1 [7]) and provides insights as to how he believes s 65 of the SISA operates in SMSFR 2008/1.

Example

John and Jane Bloggs are the trustees and members of the Bloggs Super Fund. They are also the directors and shareholders of Bloggs Furniture Pty Ltd, a newly incorporated company through which they intend to run a furniture manufacturing business.

John and Jane (as trustees of the Bloggs Super Fund) lend $500,000 to Bloggs Furniture Pty Ltd at a commercial rate of interest with the capital to be repaid to the Bloggs Super Fund in 5 years. Bloggs Furniture Pty Ltd uses this money to buy its business premises and equipment.

Does the above contravene s 65 of the SISA?

On the facts, not only is financial assistance being provided to Bloggs Furniture Pty Ltd, but also a loan. However, this does not necessarily give rise to a contravention of s 65 of the SISA. Section 65 of the SISA expressly prohibits loans and financial assistance being provided to members of the fund and/or their relatives. It does not go so far as to prohibit loans and financial assistance being provided to all related parties.

Therefore, the above facts do not give rise to a contravention of s 65 of the SISA.

ATO view

The above example is adapted from SMSFR 2008/1 (example 24), where the Commissioner said there was no contravention of s 65.

Indirect financial assistance

The above is not to say that financial assistance cannot be made to members (and/or their relatives) indirectly. The Commissioner states that financial assistance can be provided indirectly if there is a ‘sufficient connection’ (SMSFR 2008/1 [192]). More particularly, the Commissioner would likely consider there to be a sufficient connection if (SMSFR 2008/1 [194]):

  • the subsequent financial assistance being provided to fund members (and/or their relatives) would not have been given had the fund trustee not been involved;
  • the entity is in effect passing on financial assistance given to it by the fund trustee; or
  • there is something else to indicate that any subsequent financial assistance given to the members (and/or their relatives) relied upon, or was in some way conditional or dependent upon, fund resources.

In light of the above, consider the implications if Bloggs Furniture Pty Ltd had instead used the $500,000 to pay off John and Jane’s mortgage in respect of their family home or used some of the money to satisfy a debt that John and Jane owed to a third party.

This would most likely cause a contravention of s 65 of the SISA (see SMSFR 2008/1 [216]).

Other implications

Before a strategy such as the above is implemented, regard must be had to the other provisions of the SISA. In particular, remember that loans to related parties constitute in-house assets of a fund (see s 71(1) of the SISA). Therefore, the loan would need to be monitored to ensure the 5% limit is not exceeded at both the time the loan is made and every subsequent 30 June for the duration of the loan.

Further, provision of the loan should be consistent with the fund’s investment strategy and the sole purpose test and the loan should be on commercial terms.

Conclusion

SMSFR 2008/1 provides support for trustees of regulated superannuation funds to loan money to related companies. However, this should be done for legitimate purposes only and not simply as a means of circumventing s 65 of the SISA.

Ultimately, whether or not a contravention arises in these circumstances will depend on the ultimate flow of funds from the related company and whether or not this results in any financial assistance being indirectly passed onto fund members and/or their relatives.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

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