Lending by an SMSF – Tips from the Auditor

In recent times, we have noticed an increase in the popularity of lending by SMSFs.

One of the reasons Trustees give for lending money from their SMSF is to maximize the investment return to the fund. With the cash rate at an all-time low, Trustees seeking higher investment returns appear to be turning to riskier alternatives. This includes lending to related parties (within the restrictions of current superannuation rules) or unrelated third parties.

As auditors, we are required to assess whether these loans comply with current superannuation laws, and also whether these assets are presented fairly in the financial statements.

Loans usually attract greater audit scrutiny due to the increased risk of loan default, and an increased likelihood of related party transactions.

Keeping very detailed records for any loan investment is essential.

Considering lending money from your SMSF?

When considering whether to make a loan investment using SMSF funds, it is important that the Trustees weigh up the risks and benefits and follow some basic steps:

  1. Check that the investment strategy of the fund is current, and reflects the Trustees intention to make a loan investment;
  1. Ensure that the reason for making the loan is documented, and that the Trustees have specifically considered how the loan satisfies the requirement for all investments to be made for the sole purpose of retirement;
  1. Ensure that the funds’ trust deed allows for lending;
  1. Consider the risk of lending any amounts of cash, and document your research into the reputation and credit history of the intended borrower; and
  1. If considering lending to a related party:
    • Is the borrower a member or relative of a member

(rules specifically prohibit lending to these individuals)

  • The 5% In-house asset limit
  • Arms-length requirements

Documenting the loan

The loan must be documented in the investment strategy of the fund – the more detail that is included, the better.

There must be a written loan agreement, signed by both the Trustees and the borrower, setting out the terms of the loan clearly. Common loan terms include: purpose, amount, interest rate, repayment terms, security (if any), contact details of all parties, and consequences of default.

Managing the loan

Keep in touch with the borrower and keep detailed records of your communication. Monitor that the loan repayments are on track and assess recoverability each year.

Preparing for Audit

The key to a great audit experience is to understand the documentation requirements, and providing these at the commencement of the audit (rather than waiting to be asked).

Typical audit evidence includes:

  • Trust deed (does it allow lending?)
  • Investment strategy (is the loan consistent?)
  • Written executed loan agreement
  • Summary of transactions throughout the year (loan advances, repayments, interest charged and received)
  • Transactions post year end (are repayments up to date, has the loan been repaid, is the borrower starting to default?)
  • Evidence of recoverability such as financial statements or direct confirmations from the borrower
  • Market interest rate research supporting the rates for related party loans are arms-length

These documents are not only valuable during the audit process, but help inform the Trustee before making a decision to lend money from their SMSF, as well as assessing compliance with the loan agreement throughout the loan term.


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