What is catching the ATO's attention?

The Tax Commissioner has recently stated that loans by SMSFs were a major area of concern.  About 30% of SMSF audit cases involved loan investments made by SMSFs (as opposed to the new super gearing provisions which relate to loans to SMSFs).  Currently 500 SMSFs are being reviewed in relation to loans.  It seems that these funds were selected for review as their tax returns indicated that loans constituted 80% of the value of the fund’s assets.

Where a fund has a high percentage of its assets as loans, the ATO will most likely request the trustee to provide supporting documentation in relation to the loan – such as the loan agreement, security documents, the written investment strategy and interest rate charged and whether interest is being repaid or capitalised.

While a SMSF lending money for interest to persons other than members or their related parties is a permitted investment, it is vital that the loan be properly documented – that there is a loan agreement in place, the agreement is signed by the trustee and the borrower, that there is security for the loan (e.g. mortgage, charge or third party personal guarantee), that the terms of the loan agreement are being adhered to (eg that interest payments are properly calculated and paid on time) and that the security arrangement are fully effective (eg they are properly registered); that the loan is in accordance with the investment strategy of the fund and that the terms of the loan are arms length terms (eg as to interest rate charged, security given).

Possibly, it would be prudent to review all the loan documentation to ensure that everything is in order and, if not, to take appropriate corrective action before scrutiny of the ATO occurs