Assessing the integrity of unsecured SMSF loans, especially those made to individuals, is a current area of concern for auditors due to the difficulty in obtaining adequate evidence to confirm their recoverability, a specialist practitioner has said.
“Loans to individuals can be quite tricky. From a compliance point of view, there’s no issue with providing a loan to an individual or providing an unsecured loan if [the fund] thinks that it’s a good investment … however it’s often really difficult to get a complete picture of the assets and liabilities of an individual,” Red Willow Super managing director Marjon Muizer told delegates at Class Ignite 2024 held in Sydney recently.
“There will probably be a loan agreement and while the existence of an agreement and evidence of repayment supports [the fact] the loan exists, it doesn’t really say anything about the borrower’s ability to actually repay the loan.
“Some practitioners say, ‘you could just get an accountant’s letter from the individual tax accountant’, but if I were to obtain a loan from someone, my personal tax accountant is not going to know about it because I’m not earning income, so I’m not sure if that necessarily has too much value.”
According to Muizer these loans tend to be problematic from an audit perspective as the ATO expects to see multiple forms of evidence to support them.
“The market value of a loan is basically confirmed by its recoverability, and recoverability is generally confirmed by one of three things,” she explained.
“Evidence that the loan has been repaid is probably the best evidence you can get, because it shows the loan did exist and the money has come back.
“Evidence of value and ownership for any assets that are held as security is usually quite helpful provided the auditor can confirm who actually owns the asset and what it’s worth and that it definitely exists. Evidence of the financial position of the borrower confirming their ability to repay can be useful too.”
In situations where auditors cannot obtain adequate evidence, she recommended issuing a Part A qualification, which may help to reduce the risk of future litigation.
