An SMSF can make use of flow-through loans from other entities, but must ensure the loan agreements are not conflated into a single arrangement that needlessly ties them together.
Heffron client relationship manager Sean Johnston said it was possible for a family trust to borrow money from a bank and then lend those funds to an SMSF under the terms of a limited recourse borrowing arrangement (LRBA) without the bank loan impacting the LRBA.
“Presuming the LRBA is compliant and the SMSF repays the loan to the family trust before the latter has capacity to repay the bank, are there any audit issues for the SMSF?” Johnston said during a recent online briefing.
“My gut feeling in these cases is no, but if you have dotted all your i’s and crossed all your t’s on the way through, then there shouldn’t be any issues between the SMSF and the family trust because they are two separate agreements.”
He said these types of loan arrangements were often viewed as one consolidated line of money, but should be viewed as two separate transactions, including the terms and conditions that were applied.
“The other thing in terms of dotting your i’s and crossing your t’s is the loan terms won’t be the same on both sides of the fence,” he said.
“The family trust might get a loan and it will almost certainly not be limited in recourse and is probably going to have a lower interest rate and different security, so may or may not have personal guarantees.
“Looking across at the SMSF, it will either follow PCG (Practical Compliance Guideline) 2016/5 or benchmarking [for the LRBA safe harbour rates], but it can’t benchmark the loan that it just got [from the family trust] because the terms and conditions are not the same.
“If we assume it uses the PCG rate, the interest percentage will be higher, there might be a significantly shorter repayment time window and different loan-to-value requirements. They are not definitely the same loan so treat them as two separate transaction streams.”
Also speaking during the briefing, Heffron SMSF technical and education services director Leigh Mansell added this separation meant any action related to one loan had no impact on the other.
“In theory, as long as everything is quite separate, there is no consequence to the fund of the family trust repaying its loan later or earlier because they’re completely separate entities and completely separate loans,” Mansell said.
“Unless there’s something in the paperwork that somehow hooks them together, and you might have to dig to make sure there is no wording in there that upsets the applecart, it should be okay.”
