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How to set up an interest-free loan to your SMSF

John Wasiliev

Reader’s question: I am contemplating setting up an interest-free loan from myself to my do-it-yourself super fund to buy an asset, or several loans to purchase several individual assets.

Can you advise if there is any limit to the amount I can lend my fund as a percentage of the fund’s balance?

Is there a designated maximum time period for repayment of this interest-free loan? I am 55.

Setting up an interest-free loan for a DIY fund where the loan provider is a fund member is a strategy that should be approached with great care given it is potentially controversial and may only be a short-lived opportunity because it is highly likely to change in the future, says Leigh Mansell, a technical manager with DIY adviser Heffron.

The idea that such a strategy is possible arose from a discussion in June 2012 between the Australian Taxation Office and super industry representatives.

The ATO was asked if a loan made to a DIY fund by a member to their fund at a zero interest rate or a discounted interest rate was allowed. The ATO said so long as all other aspects of the loan were properly documented with the same sort of terms and conditions you see in a normal loan arrangement, then it could be possible. For example, the asset being acquired must be held in a separate trust on behalf of the super fund until the loan was repaid.

Evidence required

Terms and conditions should specify a repayment date and how the fund proposes to repay the loan. This needs to be provided as evidence that it is a truly a loan and not a sham or back-door contribution. Mansell says she hasn’t heard of anyone implementing the strategy because most advisers would recommend a related party loan should have some sort of interest rate.

No limit

These cautionary words aside, as there is no limit imposed by superannuation law and funds are even able to borrow to pay costs such as stamp duty and legals, there is no limit on how much can be lent. Loan limits are usually imposed by commercial lenders. The same goes for a repayment time period.

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