Ask Aunt Annie - Your Super Borrowing Questions Answered

26 June 2009

Each week Aunt Annie answers the best question she receives about aspects of the rules relating to borrowing by self-managed super funds. 

This week a reader writes: “Dear Aunt Annie, We have a client who has a company with significant cash reserves. Is it permissible for the company to lend to the directors’ SMSF for the purchase of a property within the SMSF?  If so, are there any Div. 7A loan implications we should be aware of in regards to the company? Sincerely, Deemed Divi Delinquent”

Dear Deemed Divi Delinquent

There is no reason why the company cannot lend to the directors’ SMSF provided all the other requirements of s.67(4A) of the SIS Act are met in respect of the loan.

However, there may be a Div 7A issue.  A shareholder’s SMSF is ‘an associate’ of the shareholder under s.318(1) of ITAA 1936.  So a loan to the SMSF is covered by the deemed dividend provisions in s.109D(1) of ITAA 1936 if the director is also a shareholder.

Presuming that the company does not fall within any of the fairly narrow exceptions in sections 109H to s.109Q, then it would need to have a Div 7A loan agreement. 

As you will need a loan agreement between the SMSF and the company anyway, the main requirements for that agreement to comply with both the super laws and Div 7A would be as follows

  • the company would have to charge not less than the Div 7A benchmark rate (this FY 9.45% - changes each year) on the loan to the SMSF
  • if real estate is being purchased with the loan and is being made available as the security then the loan must be written over not more than 25 years
  • interest payments must be paid and cannot be deferred, waived, delayed or capitalised
  • the loan must be a P&I loan so that the requisite amount of principal is repaid every year.

If you have a query regarding borrowing by an SMSF write to Aunt Annie c/- TOWNSENDS BUSINESS & CORPORATE LAWYERS or email your question to info@townsendslaw.com.au .

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