Understanding & Avoiding Prohibited SMSF Loans

Loans to members continue to top the list of reported contraventions in self-managed super funds (SMSFs), according to auditor contravention reports submitted for the 2019 to 2022 audit years.

Constituting a substantial 16% of all reported breaches, this trend underscores the importance of SMSF trustees being well-versed in the rules governing financial transactions within their funds.

It’s crucial for SMSF trustees to be aware that loaning money or providing financial assistance to a member or relative is strictly prohibited. Violating this rule can result in penalties of up to $18,780, coupled with the potential disqualification of the trustee. Being disqualified means their name is publicly disclosed, and they lose the ability to operate their fund or any other SMSF in the future.

Moreover, SMSF trustees are also prohibited from loaning money to related parties, such as a business, where the loan surpasses 5% of the fund’s total assets. This constitutes a prohibited in-house asset investment and is considered a contravention.

If an SMSF’s in-house assets exceed 5% of the total asset value at the end of the financial year, trustees must develop a plan to reduce these assets to less than 5%. This plan must be prepared and executed by the end of the subsequent financial year, with failure to comply resulting in a contravention.

All investments by your SMSF must be made on a commercial ‘arm’s length’ basis. The purchase and sale price of fund assets should always reflect true market value, and the income from fund assets should always reflect a true market rate of return.

Understanding these regulations is paramount to avoiding prohibited loans from your SMSF. If a prohibited loan has been made, swift action is necessary to rectify the breach by repaying the loan. Trustees should reach out to their appointed SMSF professionals for guidance and assistance. In cases where rectification proves challenging, the SMSF early engagement and voluntary disclosure service should be utilised. Proactively engaging with regulatory authorities before audits commence allows for consideration of the disclosure in determining appropriate actions, and mitigating potential compliance consequences. Compliance is not only a legal requirement but also essential for the integrity and longevity of your SMSF.Stay informed, act responsibly, and seek professional advice to ensure the smooth operation of your self-managed super fund.

Keeping your SMSF compliant is crucial for its seamless operation. Reach out to our SMSF Specialists Advisors today and let’s ensure your financial future stays on track.

The information contained in this publication is for general information purposes only, professional advice should be obtained before acting on any information contained herein. Neither the publishers nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication.

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