A superannuation technical specialist has stipulated demonstrable actions taken to recover an SMSF private loan must be proven before an amount in arrears can be written off in the fund’s financial statements.
Accurium technical superannuation adviser Jason Hurst noted this is the case because compliance elements such as adherence to the sole purpose test and the investment strategy rules will be involved in these situations.
“The trustees need to be seen to be making reasonable efforts to recover [the outstanding amount]. What do we expect is reasonable?” Hurst asked attendees of an Accurium technical webinar hosted today.
“If [the trustees] have lost a lot of money, they would probably want to get some legal advice [as to the recovery of the debt].”
He pointed out SMSF trustees should assess the amount of legal fees they are willing to incur in pursuit of an outstanding loan in relation to the likelihood the borrowing will actually be paid back.
“Getting some advice and being able to document that the loan is not recoverable [is a good step]. Just saying: ‘I’ve tried to ring [the borrower], but they’re avoiding me now, so can we just write the loan off?’ is not going [to be enough,” he explained.
“You’re going to need evidence of efforts to recover those funds, whether the entity is insolvent and then if there is any fraud involved, there will need to be evidence the trustees have engaged the appropriate authorities as well.”
He warned practitioners and trustees not to assume writing off an outstanding loan in an SMSF is similar to the process that applies to other entities.
“If I lent money from my family trust to another person and I’m not going to get that money back, I’m not facing SIS (Superannuation Industry (Supervision)) requirements and could probably just complete some paperwork and write off that loan, but in the super environment [you can’t do that],” he said.
