Shelley Banton, head of education at ASF Audits, said in a recent podcast that there is a misconception that an SMSF can’t borrow as section 67 of the Superannuation Industry (Supervision) Act (SIS Act) states it prohibits a fund from borrowing or maintaining existing borrowing of money except in specific circumstances.
Aaron Dunn, chief executive of Smarter SMSF, said as there is no definition of what classifies borrowing under the act, there is a need to understand the term’s ordinary meaning.
“We know that there’s a transfer or temporary transfer of an amount of money, and it’s going from, for example, me to you, where one of us is the borrower, or one of us is the lender,” he said.
“And whatever that quantum is, or whatever those terms are, there is an obligation to have to repay that amount, which might be satisfied physically with money or in other circumstances it could be satisfied by the provision of an asset.”
He said there is also the issue of limited recourse borrowings, which do put restrictions around the ability to recover that borrowing.
The ruling SMSF 2009/2 states that once an obligation or intention to repay an amount ceases, it’s no longer a borrowing, and Dunn said it is, therefore, essential to have all agreements documented.
“We need to see a demonstration of an intention to make the repayment in the form of a signed loan document, and we want to understand the terms, including what has been stipulated by virtue of the amount that has been undertaken with the loan, what are the terms and conditions of that loan around repayment, what security may have been taken in respect to that,” he said.
He added that other issues that also need to be documented include repayment schedules with respect to the amounts that need to be repaid and how often, as well as who the lender is, as often, there might be arrangements whereby a superfund might lend to an unrelated party.
“There would naturally be some additional audit information that the auditors would want to satisfy around the loan and the balance of that period of time, so really getting some additional validation between the borrower and the lender as to the ongoing nature of the agreement is important,” he said.
