As a result, in our example above, John should have transferred $200,000 from his personal account to the fund in advance of the loan amount and received the total amount of $1 million usurious upon performance of the real estate purchase agreement. The ATO guidelines have removed uncertainty for trustees. Any SMSF loan that complies with the guidelines is considered to be on commercial terms. Below is an example of SMSF credit provisions that must be met in order for them to meet the guidelines under discussion: there is a school of thought that argues that interest loans with companies and close individuals are acceptable, but we believe this could put the fund at risk, as transactions are not done on an arm`s length basis. The lender does not require the establishment of two companies Pty Ltd through SMSF and Custodian Trust. The requirements are therefore less stringent. But the SMSF cannot have credits inside the SMSF. This is a ban on the S67. Hence the need for a Custodian trust. Since the available balance of his SMSF was $200,000 less than the market value, he entered into a contract with SMSF for a loan of $US 200,000 to finance the purchase with a limited repayment agreement. Instead of paying the loan amount to SMSF, he received $US 800,000 as SMSF seller at the time of invoicing, the sale price of $US 1 million minus his US$200,000 “loan” to the Fund.
Is your advice that this can still be done if we are in too long trading conditions under House`s 5% assets and the loan? The law does not prohibit the lender from being a close party. However, it is likely that we will review LRBS with companies and related parties for which the terms of the loan combined and the day-to-day operation of the loan do not correspond to what a loan-to-be lender acting under market conditions would accept with respect to the borrowing of the fund`s agent. You can create a direct debit from the SMSF bank account to pay for the line of credit. The effect will be to continue to lend the money to your SMSF and repay it to the bank under the same conditions as you have at the bank. You are indeed a channel for credit. Although smsf members can lend money to their superfund, SMSF cannot grant a loan to a close party. It is considered a financial support for members and is contrary to the Sole Purpose test. Please see the ATO video below for more information: If you are considering a similar transaction, keep in mind that formal loan documents showing arm`s length credit terms (i.e. ATO Safe Harbor terms) may not be enough. The ATO`s current view is that there must be a transfer of money from the lender to the borrower as a necessary feature of a loan within the meaning of the Superannuation Industry Act 1993 (SIS Act).
This means that an smsf agent or investment manager cannot allow a lender with companies and relatives to charge the fund more than one exchange rate under the agreement. In the case of a Limited Navigation Management Arrangement (LRBA), an SMSF agent takes out a loan from a third-party lender. The agent must use these funds to acquire an asset (or a collection of identical assets with the same market value) that is to be held in a separate trust. It is important to note that an SMSF does not authorize the purchase of residential real estate by a related party. The ATO makes available the annual safe harbor rates of the LRBA for unit assets under the loan. Earlier this year, ATO issued the Practical Compliance Guideline 2016/5 to clarify and assist SMSF agents in structuring borrowing limited arrangements (LRBAs) for which the loan is provided by a close party. These guidelines set out the acceptable conditions for borrowing from related companies, related parties and relatives. A close party may be a member of the Fund or a relative or partner of one of the members or administrators of the Fund. The ATO had previously suggested that if a close party lends money to an SMSF, no commercial interest rate, i.e. market interest rate, is needed. .