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SMSF Lending

Discussion in 'Accounting & Tax' started by JohnPropChat, 7th Dec, 2015.

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  1. JohnPropChat

    JohnPropChat Well-Known Member

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    Curiosity only:

    Can SMSFs lend to other SMSFs, Businesses, People etc?

    I don't have much in my super at the moment but when I do, am I allowed to lend (arms length and commercial terms ofcourse) to businesses and people I think are low risk.

    Some scenarios:
    1. Someone buys a dump and is looking to reno and flip. I lend them money(secured or unsecured depending on the amount) for the renno, they do the job and flip-it and can either pay me back straight away or just stick to the 1 to 5 year term agreed when money is originally lent.
    2. Find a start-up that I think has a lot of potential, say invest 10%(of valuation) and lend 10%

    Apart from the obvious risks of financial lending (capital loss) what are the other things to look out for?
     
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yes. But many serious issues to consider.
     
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  3. CosmicTrevor

    CosmicTrevor Well-Known Member

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    As Elmer said, be vewy vewy cwafuw.

    Any action that you take as Trustee that could be considered as breaching the sole purpose test will get you in hot water with the ATO. Then you have the in house asset rule to consider as well, plus probably other issues.

    I'd only consider this after receiving the go ahead from the ATO via a private ruling (or equivalent for SMSFs - I think it is a different term).

    You will need specialist advice from an experienced SMSF lawyer and tax specialist.

    Personally I wouldn't do it.
     
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  4. Property Hoarder

    Property Hoarder Active Member

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    Yes you can but should you?

    Most of the loans I have seen over the years which were not professionally managed have ended up in a capital loss. Luckily I do not see a lot of SMSF Trustee's doing it anymore.

    If someone was low risk they would most likely go to the bank and not your fund.
     
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  5. JohnPropChat

    JohnPropChat Well-Known Member

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    If I ever do it, that's the only way. Not gonna wing it.
     
    Last edited: 7th Dec, 2015
  6. JohnPropChat

    JohnPropChat Well-Known Member

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    Good question. Banks serviceability could be a lot tighter. $20k of unsecured debt can wipe out $50k to $100k of borrowing(depending on the repayment term).

    Low-risk is subjective term. From banks' perspective it has to be all black and white. Regular consistent income from a stable job but we all know that picking up extra work to clear debt is quite a common thing.

    In the end if the benefits outweigh the risks I won't do it. Just need to find a way to consistently make 10%+(after costs) per year growth in my super. Property is certainly an option with say 1:4 leverage a even a 25% CG in 10 years will double the investment in 10 years probably do a bit better.

    But property loans for SMSFs need such high balances ($200k to $300k) it'll be a long time before my balance gets there so started looking at alternatives.
     
  7. CosmicTrevor

    CosmicTrevor Well-Known Member

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    Don't forget that your SMSF deed and investment strategy should explicitly give you the power to undertake such an investment. Your lawyer would help with this.
     
  8. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Before the lawyer is involved you need to ensure (as trustee/s) that the investment, loan etc is permitted or not restricted (ie limited). Then it must meet with the investment strategy of the fund. If it fails sole purpose, in-house assets etc it doesn't matter what the deed says. Then once you get around those issues then definitely get a lawyer involved. Unsecured loans may be a higher risk than you think. Lawyers can recommend ways to take a charge that aren't a mortgage for example. And don't believe anyone's view that a promissory note is secured - Other than your own lawyer.

    I have had clients with very arms length arrangements given a qualified audit report as the loan was not adequately secured. Yes their investment strategy acknowledged it was unsecured and a higher risk. The auditor didn't agree. Then its over to the ATO to decide. The loans in each cases were strung out beyond the agreed terms. The trustee had no right to enforce. So it got qualified.

    What you think is unrelated and arms length may not be. Basically if they are a distant relative or a friend acquaintance etc there may be serious issues on top of it being a poor financial judgement call.
     
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  9. Redwood

    Redwood Well-Known Member

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    Dear John -

    Very risky as detailed above and can be costly particularly with a small amount of $$. The above posts cover off what you need to be aware of and a legal agreement will need to be prepared and executed. Generally there is a higher interest rate, however there is a higher risk.

    You can choose a private lender, a respected lawyer we use is Raoul Vernon, you can contact him to discuss your options and obtain advice on the r Lending snapshot | Vernons Solicitors

    Re what your auditor thinks, we have many clients on the books with private loans, an auditor will use their judgement as mentioned above, but common-sense prevails. You want a tight legal agreement - parties not related - a commercial interest rate documented, - payment terms and an up to date Trust Deed prepared by a lawyer and an investment strategy documenting your investment objective in line with the overall strategy of the fund. Like I say 'judgement' comes into play and every auditor has a different judgement threshold - however if it follows the above - I have no issue with it and when in doubt I recommend a legal opinion. There are many that loan SMSF money to related companies as well....

    Cheers, Ivan
     
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  10. JohnPropChat

    JohnPropChat Well-Known Member

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    Thanks for the heads up, guys. Really appreciate it. Bottom line is that it has be bullet proof or very close, to even try something like this.
     
  11. Ace in the Hole

    Ace in the Hole Well-Known Member Premium Member

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    We needed a few hundred k once to finish off a development.
    Someone lent us the cash from their super fund.
    Was pretty expensive for us but didn't have anywhere else to get the cash.
    They made a very nice return.
    All worked out good in the end.
     
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  12. Redwood

    Redwood Well-Known Member

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    See that alot mate - 12 month loan - fixed rate....still risk but you will be able to make your own mind up on risk - still a strong legal agreement is required...

    Cheers Ivan
     
  13. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Read a great article by Grant Abbott on the likely increased use of SMSF to SMSF loans to buy propertiess too. As banks withdraw from this market why not ? Of course a liquidity risk for the lender etc but perhaps a income stream is a great thing for some. Lend to a SMSF secured at 7%...Where else can you earn that ?? Like a annuity and can be a sound strategy for both funds etc provided its VERY arms length. A major fail otherwise. This can all fall under P2P lending and it will increase as bank capital ratios etc get APRA focus. Basically any SMSF can be a lender - As long as it does it well.

    When doing deals like this I would think a heads up early with the fund auditor is a wise investment to avoid problems after the event when it cannot be fixed.