SMSF practitioners looking to assess the nature of a loan by a fund to a related party should look for evidence the money was intended to be lent and returned to prevent it being viewed as illegal early access.
Heffron SMSF specialist Sean Johnston said the distinction between a loan and illegal early access came down to what the intention was behind the money leaving the fund and how that was recorded at the time.
“At the point money came out of the fund, did the related party have an intention to repay it? Was it supposed to be a loan because if the member has just taken money out, we shouldn’t be dressing it up as a loan,” Johnston said during a webinar yesterday.
“If the ATO looks at this, they are going to want some contemporaneous evidence this was a loan and ask for loan documents, and you don’t want to be backdating them, because they actually said that is fraud.
“Even if they did intend to repay the loan and they haven’t got documents in place, you should be putting documents in place now that acknowledge the documents are not there, but there was always an intention to repay.”
He said given the ATO’s ongoing focus on illegal early release of superannuation money, any loans from an SMSF without documents should be more closely examined.
“If we have got early access but dressed it up as a loan in the past, and been carrying it as such for too long, and now state it’s never coming back in, what do we do with it?” he added.
“In most cases it’s probably illegal early access and we should have treated them differently four or five years ago.
“Don’t forget, however, that even if it is a genuine loan, there are other compliance issues attached to this.”
He pointed out these could include a breach of section 65 of the Superannuation Industry (Supervision) Act if the money has gone to a related party and then on to members, as well as a potential breach of the sole purpose test if SMSF money has been used to prop up a business.
Additionally, he highlighted the SMSF would be unable to write off the loan as a bad debt as it was unlikely to have recorded it on the profit and loss statement as income and was not in the business of lending.
“You’re not going to get a bad debt write-off for this one, but you may get a capital loss, but you have to demonstrate the loan is worthless and uncallable, and if those conditions are met, you may claim it as a loss,” he said.
