Auditing, Legislation, SMSF

SMSF loans and debts not the same

SMSF Loan Debt Borrowing audit The Auditors Institute Chris Ketsakidis Ketsa Coleman

There is a difference between a loan and a debt within an SMSF and different rules apply to them, requiring good documentation at the time of audit.

SMSF trustees and auditors should be aware of the difference between a loan and a debt owed within a fund and ensure there is clear documentation to avoid breaching the general prohibition on borrowing within the superannuation rules, according to a financial services lawyer.

Ketsa Coleman partner Chris Ketsakidis said while section 67 of the Superannuation Industry (Supervision) (SIS) Act made it clear SMSFs were restricted from borrowing money, except under a limited recourse borrowing arrangement, it was important to recognise some debt-generating activities in a fund were not considered borrowing under the act.

“We need to distinguish between what is a loan or a borrowing and what is a debt,” Ketsakidis said during a webinar presented by The Auditors Institute today.

“A borrowing is effectively a temporary giving of a sum of money to an individual with a promise to repay on certain terms. A debt is an amount which is owed by one party to another party.

“What is not a borrowing might be a contribution or a liability to pay benefits or an arrangement with an agent to pay expenses on your behalf.”

He said the contribution could take the form of expenses of the SMSF being paid for by the trustee.

“I can pay an expense on behalf of the super fund without reimbursement and in that case the expense paid by me is deemed to be a contribution and the ATO agrees with that,” he said.

“In regards to an arrangement with agents that may occur where there is an estate agent who pays expenses on your behalf and there’s an agreement there is a reimbursement promptly afterwards, but that is also not a borrowing.

“So when you’re undertaking the audit to figure out whether it was a loan or a debt, ask for the document between the SMSF and any other party to determine the nature of those arrangements.

“In some cases, ideally, they have everything documented, but you might need some external advice because it is really complicated trying to figure out what is the debt, what is the loan and what is a financial accommodation.”

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