SuperConcepts technical support and training manager Marjon Muizer said that for SMSFs with loans to an unrelated trust or company, or even to an unrelated individual, the auditor will be closely checking for evidence of certain details.
For these types of loans, Ms Muizer said the loan agreement needs to specify the terms and conditions of the loan including how the interest rate is determined, whether the loan is secured or unsecured, and the term of the loan.
“The fund’s auditor will be interested in the purpose of the loan and the business of the borrower,” she explained in an online article.
“Recoverability of the loan will have an influence of its market value. Evidence could include whether repayments have been made as required by the loan agreement, details on the financial position of the borrower confirming the ability to repay the loan including net asset position, sources of cash, and details and value of security held as collateral for the loan.”
Unsatisfactory evidence, she warned, is “likely to invite greater auditor scrutiny”.
The evidence needs to go further than statements by the fund trustees or the borrower providing an assessment of the recoverability of the loan, she cautioned.
“A copy of the loan agreement and evidence that interest has been paid on the loan merely establishes that the loan exists. But it doesn’t provide enough evidence of the loan’s value, whether it is recoverable and the borrower’s financial position concerning future repayments,” she said.
Where the auditor has not been able to obtain enough evidence concerning the investment, they may qualify the financial and compliance sections of the audit report, she said.
“It’s always sensible to ensure that any investment undertaken by your SMSF is correctly documented, especially if the trust or company is unlisted or there is a loan to an unrelated party,” she added.
“The auditor will be after adequate evidence to establish the existence of the investment and whether it is recoverable. If this information is not available, your SMSF may end up with a qualified opinion and an ACR sent to the ATO.”
It goes way further than that and if an auditor stops here they should read Cam v Bear. At a minimum, whether it is related party (an in-house asset but never members) or unrelated party there needs to be a written legal agreement with security – mortgage deed or personal guarantee. Plus check the deed to see if it allows it, the company constitution as well if a corporate trustee and also an investment strategy before it is completed. And under no circumstances should any professional being recommending this type of loan without considering credit licensing requirements. Oh and the auditor should be checking all of this under the SISA.