ATO, Compliance, SMSF

ATO worry over loans to members

ATO SMSF Loans to members illegal early access Paul Delahunty

The ATO is worried about the practice of SMSFs lending money to members as a flag for potential illegal early access of fund assets.

Loans made from an SMSF to its members is a practice causing the ATO concern as an indication individuals are participating in illegal early access of their retirement savings benefits.

ATO superannuation and employer obligations director Paul Delahunty revealed the fact this practice ranks highly among the most common SMSF compliance contraventions is causing some angst.

“It is worth pointing out, as a starting point, loans to members are prohibited under [the Superannuation Industry (Supervision) Act], and that includes relatives, under section 65 and where there are payments being made to members, the ATO is obviously concerned there may be an inappropriate access of the SMSF’s funds,” Delahunty confirmed.

Even though loans to members are prohibited by law, he pointed out there is still a structural consideration of which auditors and trustees need to be aware in order to rule out an act of blatant illegal early access of fund assets.

“That is whether there is a legitimate loan in place. A payment that is neither related to a loan nor a superannuation payment which meets a condition of release would be considered illegal early access and that’s where the issue escalates in terms of potential compliance risk and how we treat it,” he noted.

To this end, he warned against the practice of trying to make illegal early retirement savings drawdowns, even if performed as a genuine error, appear as loans in an attempt to give them a degree of acceptability.

“Our position on that is you can’t rewrite history. So if the fund has been in a position, and by some means it might have been a mistake in certain circumstances, where an inappropriate payment [has been made] outside the scope of normal conditions of release and it’s not a loan arrangement, then we wouldn’t want trustees going through the process of trying to replicate a loan agreement for the purpose of satisfying the ATO in trying to avoid potential reporting of contraventions,” he said.

While he acknowledged Self Managed Superannuation Funds Ruling 2008/1 provides guidance on factors indicating if an arrangement involves giving financial assistance, he suggested common-sense principles, such as duration and interest payment terms, should be used to determine if a loan agreement is actually in place.

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