Related Party Loans

According to the ATO rules, a related party is a Member of the SMSF. That means, a Member who makes contributions into the SMSF and receives benefits from the SMSF.

Conditions and circumstances for borrowing for an SMSF:

An SMSF can borrow money for a short period of time if that amount is less than 10 per cent of the fund’s total assets. Those conditions are:

* A maximum of 90 days to meet benefit payments or to pay an outstanding surcharge liability; or

* A maximum of seven days to cover the settlement of security transactions. You can also only do this if, when you bought the securities,                                              you did not think you would need to borrow funds.

However, there are exceptional circumstance when an SMSF can attain loans, they are:

1. Limited Recourse SMSF Borrowing Agreement

2. Related party

A related party loan is when the Members of an SMSF act as the Bank towards the Fund. Not to forget that, it is significant to confirm the terms of lending to the SMSF are on an arms-length basis and issued on commercial terms.

A limited recourse borrowing arrangement (LRBA) involves an SMSF Trustee taking out a loan from a third-party lender. The Trustee has to use those funds to purchase a single asset (or collection of identical assets that have the same market value) to be held in a separate Trust. It is crucial to note that, an SMSF does not allow to purchase of any residential properties from a related party.  The ATO provides the annual LRBA safe harbour interest rates for the unit assets under the loan.

The returns earned from the asset go to the SMSF Trustee. In case if the loan defaults, the lenders’ rights are restricted to asset apprehended in the separate trust. This means there is no recourse to the other assets held in the SMSF. An SMSF loan can be used to buy investment property. The returns on the investment – whether that’s rental income or capital gains – are funnelled back into the super fund, increasing your retirement savings.

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